It has mainly three popular methods.
NPV > 0 , accept project
NPV < 0 , reject project
NPV = 0 , indifferent in decision making.
ii) B/C ratio or profitability index
– It is the ratio of present worth of benefit stream divided by present worth of cost stream.
B/C > 1 , project accepted
B/C < 1 , project rejected
B/C = 1 , Indifferent
iii) Internal rate of return ( IRR )
– Earning rate of project under evaluation.
– Discount rate at which NPV= 0 .
Interpolation is the process of finding a desire value between two other value.
IRR > cost of capital , accept project.
IRR < Cost of capital , reject project.