Methods of Ranking Investment Proposals



The final step in a the capital budgeting system involves evaluating the profitability of the alternative project and selecting the best one. A firm may face a situation where more investment proposals may be available than investible funds. Some proposals may be good, some moderate, and many poor. Hence, a ranking procedure has to be evolved so that the available funds can be allocated among different proposals in a profitable manner. Essentially, the ranking procedure envisages relating of a stream of future benefits to the cost of investments. Among the various methods, the following are commonly used by many business concerns:

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