What are the different methods used for assessing project feasibility in capital budgeting?

The different methods used for assessing project feasibility in capital budgeting include:

1. Payback Period: This method calculates the time required for the project to generate enough cash flows to recover the initial investment. Projects with shorter payback periods are considered more feasible.

2. Net Present Value (NPV): NPV calculates the present value of all cash inflows and outflows associated with the project. If the NPV is positive, the project is considered feasible as it indicates that the project will generate more value than the initial investment.

3. Internal Rate of Return (IRR): IRR is the discount rate at which the present value of cash inflows equals the present value of cash outflows. If the IRR is higher than the required rate of return, the project is considered feasible.

4. Profitability Index (PI): PI is the ratio of the present value of cash inflows to the present value of cash outflows. A PI greater than 1 indicates a feasible project.

5. Accounting Rate of Return (ARR): ARR calculates the average annual profit generated by the project as a percentage of the initial investment. If the ARR exceeds the required rate of return, the project is considered feasible.

6. Sensitivity Analysis: This method assesses the impact of changes in key variables (such as sales volume, costs, or interest rates) on the project's feasibility. It helps identify the project's sensitivity to different scenarios.

7. Scenario Analysis: This method involves analyzing the project's feasibility under different scenarios or assumptions. It helps evaluate the project's robustness and potential risks.

8. Real Options Analysis: This method considers the flexibility to make future decisions based on the project's performance. It assesses the value of potential future options, such as expanding or abandoning the project, to determine feasibility.

It is important to note that different methods have their strengths and limitations, and a combination of these methods is often used to assess project feasibility comprehensively.