Capital Budgeting & Financial Modeling

Concept

Key Methods

NPV: PV of cash flows minus investment. Positive = accept. IRR: rate that makes NPV zero. If IRR > cost of capital, accept. Payback: time to recover investment. Ignores time value of money.

Key Point

NPV vs. IRR Conflicts

For mutually exclusive projects, always use NPV when NPV and IRR conflict. NPV directly measures value creation.

Concept

Sensitivity & Scenario Analysis

Sensitivity: change one variable at a time. Scenario: change multiple variables (base/best/worst case). Both help understand risk and key value drivers.

Valuation Methods

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Practice Questions