When various capital budgeting techniques rank mutually exclusive projects differently, which of the following is theoretically most reliable?
A) IRR
B) Equivalent annual cost (EAC).
C) NPV
D) Discounted payback

Question

Quizplus · Accepted Answer

NPV is theoretically the most reliable capital budgeting technique because it considers the time value of money and gives an absolute dollar value of the project's profitability. IRR and discounted payback do not necessarily consider the size of the project or provide an absolute dollar value, while EAC is only useful for projects with equal lives and doesn't necessarily provide a clear indication of profitability. Therefore, NPV is the best choice in situations where projects are mutually exclusive and ranking them is necessary.

When Various Capital Budgeting Techniques Rank Mutually Exclusive Projects Differently