CAPITAL BUDGETING TOOLS

• Capital budgeting is the process by which investors determine the value of a potential investment project.
• The three most common approaches to project selection are payback period (PB), internal rate of return (IRR) and net present value (NPV).
• The payback period determines how long it would take a company to see enough in cash flows to recover the original investment.
• The internal rate of return is the expected return on a project. If the rate is higher than the cost of capital, it's a good project. If not, then it's not.
• The net present value shows how profitable a project will be versus alternatives, and is perhaps the most effective of the three methods.

Of the three tools you mentioned,which do you feel is the most reliable?Why?

Are there any other alternatives, or are these tools some of the most reliable that currently exist?