The ________ model is usually considered the best of the capital budgeting decision-making models.
A) Internal Rate of Return (IRR)
B) Net Present Value (NPV)
C) Profitability Index (PI)
D) Discounted Payback Period

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) model is considered the best of the capital budgeting decision-making models because it takes into account the time value of money, considers all cash flows over the life of the project, and provides a clear measure of actual dollar value added to the firm. IRR is a close second, but may not be as reliable in situations where there are non-conventional cash flows or multiple internal rates of return. PI and discounted payback period are less reliable measures and should be used as supplements to NPV and IRR.

The ________ Model Is Usually Considered the Best of the Capital