Ask the Expert

Should I use a combination of IRR, NPV and payback for capital budgeting?

I am wondering what method -- internal rate of return (IRR), net present value (NPV) or payback -- is the best method to use for capital budgeting purposes. Can you help?

    Requires Free Membership to View

For capital budgeting, you'll want to examine the total investment in capital that is needed for the project – both initially, and over time.

For selecting the best project, you would use a combination of key financial indicators including IRR, NPV and payback to determine which project has the best risk versus reward. This is where net present value (NPV) can be used to gauge which project has the highest net benefit in today's dollar terms to the company, internal rate of return (IRR) can be used to gauge which project generates the greatest interest rate return, or payback period can be used to gauge which project generates a positive cash flow – where cumulative benefits exceed cumulative costs soonest (often a measure of risk).

This was first published in May 2007

There are Comments. Add yours.

TIP: Want to include a code block in your comment? Use <pre> or <code> tags around the desired text. Ex: <code>insert code</code>

REGISTER or login:

Forgot Password?
By submitting you agree to receive email from TechTarget and its partners. If you reside outside of the United States, you consent to having your personal data transferred to and processed in the United States. Privacy
Sort by: OldestNewest

Forgot Password?

No problem! Submit your e-mail address below. We'll send you an email containing your password.

Your password has been sent to: