From the following techniques of capital budgeting decision, indicate the correct combination of discounting techniques. 1. Profitability index 2. Net present value 3. Accounting rate of return 4. Internal rate of return

The correct answer is C. 1, 2, 4.

Profitability index (PI), net present value (NPV), and internal rate of return (IRR) are all discounting techniques. Accounting rate of return (ARR) is not a discounting technique.

• Profitability index is a ratio of the present value of cash inflows to the initial investment. It is a measure of the efficiency of a project. A project with a PI greater than 1 is considered to be profitable.
• Net present value is the sum of the present values of all future cash flows discounted at a given rate of return. A project with a positive NPV is considered to be profitable.
• Internal rate of return is the rate of return that makes the net present value of a project equal to zero. A project with an IRR greater than the required rate of return is considered to be profitable.

ARR is a measure of profitability that is calculated by dividing the average annual net income by the average investment. It is not a discounting technique because it does not take into account the time value of money.