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

What method -- internal rate of return (IRR), net present value (NPV) or payback -- is the best method to use for capital budgeting purposes? Read advice here.

Published: 09 May 2007

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?

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...

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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).

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cost-benefit analysis (CBA) Cost-benefit analysis (CBA) is an analytical tool for assessing and the pros and cons of moving forward with a business proposal.

internal rate of return (IRR) Internal rate of return (IRR), also called the dollar-weighted rate of return or yield on project, is the interest rate that will bring a series of positive and/or negative cash flows to a net present value (NPV) of zero.

Calculating ROI on IT projects is useful but not sufficient Calculating ROI on IT projects is necessary and useful. ROI is only as good as the assumptions that go into it, however -- including a company's track record on project delivery.

How to perform a cost/benefit analysis: Build a model, not a number CIO Niel Nickolaisen recommends doing a cost/benefit analysis based on building a working model, not numbers.

CRM ROI quiz. For many years, the return on investment (ROI) from CRM implementations was dissapointing -- at one point, analysts suggested that eight out of 10 projects failed to deliver on ROI promises. Today's reports are more optimistic, and many organizations claim that their CRM initiatives have exceeded ROI expectations. In any case, there's still a lot to learn about ROI for CRM. Take this quiz to test your knowledge of ROI, learn the definitions for various metrics used with ROI calculations, including internal rate of return (IRR) and net present value (NPV), and read expert advice on how to get ROI from your CRM projects.

Calculating risks and measuring return on CRM software with IRR and NPV Read Tom Pisello's advice on calculating risks and measuring return on CRM, including advice on IRR and NPV in this tip.

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