Match each capital budgeting method with its definition. METHODS 1. Accounting rate of return 2. Internal rate of return 3. Net present value 4. Payback Definition Capital Budgeting Method a. Is only concerned with the time it takes to get cash outflows returned b. Considers operating income but not the time value of money in its analyses c. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness d. The true rate of return an investment earns

1. Accounting rate of return ⇒ Considers operating income but not the time value of money in its analyses.

Accounting rate of return is only concerned with the rate of return made over the life of the asset.

2. Internal rate of return ⇒ The true rate of return an investment earns.

Internal rate of return shows the true rate of investment and it does so by equating the NPV to zero.

3. Net present value ⇒ Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness.

Net Present value allows us to subtract the present value of outflows from inflows and is a very useful capital budgeting techniques.

4. Payback ⇒ Is only concerned with the time it takes to get cash outflows returned.

Payback period is concerned with the time it would take to pay off the investment. It does not try to convince other titans.

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