If only one capital budgeting tool were to be used to evaluate the project,which should it be?

Question

Quizplus · Accepted Answer

Net present value (NPV) is the best choice among the given options as it takes into account the time value of money and provides the present value of all cash inflows and outflows relevant to the project. Compared to other tools like payback and discounted payback, NPV accounts for the project's entire life and gives a more accurate reflection of the project's profitability. Additionally, compared to profitability index and internal rate of return, NPV is less prone to errors arising from reinvestment assumptions. NPV helps in comparing different projects and selecting the one that maximizes shareholder value.

If Only One Capital Budgeting Tool Were to Be Used