CAPITAL BUDGETING DECISIONS AND THE MULTIPLE RATES OF RETURN CONTROVERSY – A REVIEW

Ayodele Thomas D.

Department of Accounting and Finance

Ajayi Crowther University, Oyo

e-mail:ayodeleconcept@yahoo.com

ABSTRACT

Capital budgeting as a decision area in finance establishes goals and criteria for investing resources in long term projects. It has a wide application in government as well as in private enterprises. There are various methods of capital budgeting. They are payback period, Accountancy rate of return, Net present value (NPV) Profitability Index (PI) and the Internal rate of return (IRR). Two of the techniques (NPV and IRR), will give the same ranking when two or more independent projects are evaluated. (i.e both will give the same accept- reject decision for independent projects). However, when two mutually exclusive projects are under consideration, a conflict usually occurs in the ranking by either of them. The paper therefore reviewed the various circumstances leading to contradictions between the NPV and IRR and the various bail outs by finance authors.  Notwithstanding the fact that the conflict between the NPV and the IRR can be resolved, it was discovered that there are still some grey areas that should be of great concern to authors and this has gone a long way to still confirm the superiority of NPV to IRR as project appraisal techniques.