A key assumption of NPV is that cash flows generated during the project life are reinvested at the firm's Cost of Capital (Required Rate of Return), which is considered more realistic than the IRR assumption.

IRR is defined as the discount rate at which NPV is zero. If NPV calculated at the cost of capital is zero, then the IRR must be exactly equal to that cost of capital.

Payback period only focuses on how quickly the initial investment is recovered. It ignores profitability (total cash flows) and the Time Value of Money (unless discounted payback is used).

Because future cash flows are discounted (reduced in value), it takes more time (more years) to recover the initial investment in present value terms compared to nominal terms.

PI = PV of Cash Inflows / Initial Investment. If PI > 1, it means the project generates more value than it costs (NPV is positive), so it should be accepted.

Sensitivity Analysis helps identify which variables (like sales price or raw material cost) the project is most sensitive to, indicating where the risk lies.

NPV is preferred because it measures the absolute addition to shareholder wealth and uses a realistic reinvestment rate (Cost of Capital), whereas IRR assumes reinvestment at the IRR itself, which may be unrealistic.

Discounting is the reverse of compounding. It determines what a future amount is worth today, given a specific interest rate.

Unlike other methods (NPV, IRR, Payback) which use Cash Flows, ARR uses Accounting Profit from the P&L account.

NPV gives an absolute value which favors larger projects. PI (Benefit-Cost Ratio) gives a relative measure (Value per rupee invested), making it better for ranking projects of different sizes.

Standard IRR assumes cash flows are reinvested at the IRR rate (often unrealistic). MIRR assumes reinvestment at the Cost of Capital (WACC), providing a more accurate picture of profitability.

Under RADR, a higher discount rate (Risk-Free Rate + Risk Premium) is used for riskier projects, which lowers the Present Value of future inflows, making the acceptance criteria stricter.

Traditional NPV ignores future flexibility. Real Options approach values the ability to change course (e.g., abandoning a failing project early), adding value to the investment.

Instead of adjusting the rate (RADR), CE adjusts the numerator (Cash Flows) by multiplying uncertain flows with a CE coefficient (0 to 1) to get certain flows, then discounts them at the risk-free rate.

Decision making focuses on "what changes". Only the extra cash inflow or cost saving generated by the new machine over the old one is relevant.

Decision trees map out sequential decisions and uncertain outcomes (with probabilities), allowing managers to evaluate complex, multi-stage investment proposals.

When the direction of cash flows changes more than once (e.g., heavy maintenance cost in year 5 causing a net outflow), the IRR equation can have multiple mathematical solutions, making IRR unreliable.

Under Capital Rationing, the firm must select the combination of projects that maximizes total NPV within the budget constraint (often using Profitability Index).

Sunk costs are past costs that have already been incurred and cannot be recovered (e.g., money spent on market research last year). They should not affect the decision to accept/reject a project today.

Post-Audit provides feedback, helps identify why forecasts went wrong, and improves future decision-making. It is a control mechanism.