SUMMARY
Capital budgeting techniques need some adjustments in order to be closer to real life situations. In the real world, the size of funds available for investment is often limited. In such cases, the finance manager selects the proposal/ proposals in a way that helps fully utilise the available resources, and at the same time, maximises the NPV or the profitability index.
Again, the inflationary trend is a common phenomenon. In order to incorporate the inflation factor, the cash flow as well as the discount rate is adjusted for inflation and then only the NPV is found out.
When two proposals have unequal lives, it becomes difficult to have a comparable picture of NPV or IRR. In such cases, the annualised NPV is found out. Alternatively, ...
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