Which of the following ranks decision rules from worst to best in terms of their overall usefulness in capital budgeting analysis.
A) Payback, IRR, NPV.
B) Payback, NPV, IRR.
C) IRR, NPV, Payback.
D) NPV, IRR, Payback.
E) IRR, Payback, NPV.

Question

Quizplus · Accepted Answer

The correct ranking from worst to best in terms of overall usefulness in capital budgeting analysis is Payback, IRR, NPV. Payback period is a simple but less comprehensive method as it ignores the time value of money and cash flows after the payback period. IRR takes into account the time value of money but can give misleading results in certain scenarios, such as non-conventional cash flows or mutually exclusive projects. NPV is considered the best method as it provides a direct measure of the added value to the firm, considering all cash flows and the time value of money.

Which of the Following Ranks Decision Rules from Worst to Best