Wednesday, May 23, 2012

Capital Budgeting Practice by Real Accountants

There was a study of capital budgeting practices of fourteen large worldwide companies and it was discovered that all the companies, except one, used a payback. With payback method and/or other techniques, about 66% of companies used internal rate of return (IRR) and about 40% used net present value (NPV). 


Overall, the survey indicated that Internal rate of return (IRR) was the second most popular method. 

The reasons for the popularity of payback in order of significance were stated because of its simplicity to use and understand. Also, the popularity of payback was due to the strong emphasis on the early recovery of investment and good focus on risk. 

Lastly, it was also found that 33% of companies always insisted on the computation of payback for all projects that they undertake, 33% for majority of projects and remaining for some of the projects.


For most companies, standard payback ranged between three and five years.

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