IGNOU MCO 7 2026 - Discuss the various investment appraisal techniques used in

Question

Discuss the various investment appraisal techniques used in capital budgeting decisions. Critically examine their merits and limitations.

12 Feb 2026

Answer :

Word Count : 480

Capital budgeting decisions involve evaluating long-term investment projects to determine whether they add value to the firm, and several investment appraisal techniques are used to guide such decisions. The most common methods include Payback Period, Accounting Rate of Return (ARR), Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI), each offering different perspectives on project viability. The Payback Period method measures the time required to recover the initial investment from project cash inflows. Its main merit lies in simplicity and ease of understanding, making it useful for quick screening of projects and for firms emphasizing liquidity or operating in uncertain environments. However, it ignores cash flows occurring after the payback period and fails to consider the time value of money unless modified. As a result, projects that are profitable in the long run may be rejected if their payback period

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