Capital Budgeting: Discounted Payback Period and Profitability Index
Finance and nonfinance professionals, functional managers, executives, and all individuals in key roles involved directly or indirectly with the capital budgetary planning and process in an organization
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When it comes to deciding which new projects to invest in, organizations rely on quantitative tools to objectively compare different proposals. Using measures such as profitability index (PI) and discounted payback period (DPBP), decision makers assess which projects to undertake the ones that will maximize the value of the organization. These tools account for changes in the value of future cash flows due to the time value of money.
This course presents two tools commonly used in the capital budgeting process, profitability index and discounted payback period, and demonstrates how to calculate each. It explores the strengths and limitations of these tools, and describes how organizations use them to guide their investment decisions.
Discounted Payback Period and Profitability Index
- recognize the benefit of considering the time value of money when quantitatively assessing capital projects
- perform a preliminary screening of a capital budgeting project based on the discounted payback period (DPBP)
- distinguish between strengths and limitations of the DPBP method
- calculate profitability index (PI) and use it to make a capital budgeting decision
- distinguish between NPV and PI in terms of their strengths and limitations
- determine which quantitative method or methods will be most useful for making capital budgeting decisions in a given scenario