Capital Budgeting Techniques Using Discounting

The question asks to identify capital budgeting techniques that employ the discounting criteria. Discounting involves adjusting future cash flows to their present value, considering the time value of money. This is crucial for accurate investment appraisal.

Analysis of Techniques

• Net Present Value (NPV): NPV calculates the present value of future cash inflows minus the present value of cash outflows. It explicitly uses a discount rate, thus following the discounting criteria. The formula involves summing discounted cash flows:
  

  $ NPV = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t} - Initial Investment $

• Benefit-Cost Ratio (BCR): Also known as the Profitability Index, BCR compares the present value of benefits (cash inflows) to the present value of costs (cash outflows). It requires discounting future cash flows.

  $ BCR = \frac{\sum_{t=1}^{n} \frac{CF_{in,t}}{(1+r)^t}}{\sum_{t=0}^{n} \frac{CF_{out,t}}{(1+r)^t}} $

• Accounting Rate of Return (ARR): ARR is calculated using average accounting profits (based on accrual accounting) divided by the average investment. It does not consider the time value of money or discount cash flows.

  $ ARR = \frac{\text{Average Annual Profit}}{\text{Average Investment}} \times 100\% $

• Internal Rate of Return (IRR): IRR is the discount rate at which the NPV of a project equals zero. Calculating IRR inherently involves the concept of discounting future cash flows.
• Payback Period: This technique measures the time required to recover the initial investment from the project's cumulative cash flows. It typically uses undiscounted cash flows and ignores cash flows beyond the payback point.

Conclusion

Based on the analysis, Net Present Value (A), Benefit-Cost Ratio (B), and Internal Rate of Return (D) follow the discounting criteria. Accounting Rate of Return (C) and Payback Period (E) do not.

Therefore, the correct combination is A, B, and D.