Ch 3 · Capital Budgeting (Investment Decisions)

5 concept points · 5 formulas · 4 exam-critical points.

📘 Core concepts

• 1Long-term investment decisions involving capital expenditure.
• 2Techniques: Payback, ARR (traditional); NPV, IRR, PI, Discounted Payback (DCF).
• 3NPV decision rule: accept if NPV > 0; for mutually exclusive — choose highest NPV.
• 4IRR: discount rate at which NPV = 0; may have multiple IRRs with non-conventional cash flows.
• 5Risk analysis: sensitivity, scenario, Monte Carlo, certainty equivalent, risk-adjusted discount rate.