The principal capital budgeting models for evaluating information technology projects are the payback method, the accounting rate of return on investment (ROI), the net present value, and the
A) future present value.
B) internal rate of return.
C) external rate of return.
D) ROPM.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is a better choice for evaluating IT projects as compared to the other three models. The payback method only measures the time it takes to recover the initial investment, with no consideration for the future profitability of the project. The accounting rate of return on investment (ROI) measures the average annual income generated by the project as a percentage of the initial investment, but it does not consider the time value of money. The net present value (NPV) takes into account the time value of money but assumes a constant discount rate, which may not be accurate for IT projects. On the other hand, IRR takes into account the time value of money and provides the rate of return that would make the present value of cash inflows equal to the present value of cash outflows. This allows for a more accurate evaluation of the profitability of IT projects.

The Principal Capital Budgeting Models for Evaluating Information Technology Projects