In this chapter, we considered six different models for making capital investment decisions: (1) payback period, (2) discounted payback period, (3) net present value (NPV), (4) internal rate of return (IRR), (5) modified internal rate of return (MIRR), and (6) profitability index (PI). Let’s look at the strengths and weaknesses of each model:
Payback period is simple and fast, but economically unsound. It ignores all cash flow after the cutoff date and ignores the time value of money.
Discounted payback period incorporates the time value of money, but still ignores cash flow after the cutoff date.
Net present value (NPV) is economically sound and properly ranks projects across various sizes, time horizons, ...