Which of the following common quantitative techniques used in capital budgeting is best associated with the use of a table that describes the present value of an annuity?
A.
Cash payback technique.
B.
Discounted cash flow technique: net present value.
C.
Annual rate of return
D.
Discounted cash flow technique: internal rate of return.
Capital budgeting techniques help organizations evaluate long-term investment decisions by assessing future cash flows and their present value. A present value of an annuity table is commonly used in methods that involve discounted cash flows over multiple periods.
Let's analyze the options:
A. Cash payback technique.
Incorrect. The payback period simply calculates the time needed to recover an investment and does not use discounting or present value tables.
B. Discounted cash flow technique: net present value (NPV).
Incorrect. While NPV involves discounting future cash flows, it does not specifically rely on the present value of an annuity table. Instead, NPV uses individual present values of cash flows at a specific discount rate.
C. Annual rate of return.
Incorrect. This method calculates return on investment based on accounting numbers and does not involve discounting future cash flows.
D. Discounted cash flow technique: internal rate of return (IRR). ✅ (Correct Answer)
Correct. The IRR method determines the discount rate that equates the present value of cash inflows to the initial investment (i.e., NPV = 0).
The present value of an annuity table is essential in IRR calculations, especially when future cash flows occur at regular intervals.
IRR is widely used in capital budgeting to compare different investment opportunities.
IIA GTAG (Global Technology Audit Guide) – Auditing Capital Budgeting Decisions – Discusses techniques used for investment evaluation.
COSO ERM Framework – Financial Decision-Making – Covers capital budgeting risks and techniques.
GAAP & IFRS – Investment Decision Guidelines – Explains the importance of present value calculations in investment evaluations.
IIA Standard 2130 – Control Over Capital Investments – Focuses on internal audit’s role in assessing capital budgeting techniques.
IIA References:
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