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Net Present Value Analysis vs. Internal Rate of Return vs. Payback Period

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Discuss the major capital budgeting methods used by corporations to evaluate projects. Why do many corporations continue to use the payback period method? Which method do you prefer? Explain why you prefer this method.

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Solution Summary

Compares and contrasts net present value analysis, internal rate of return, and payback period in 481 words with a reference.

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NOTE: This guide was not formatted based on any citation style; however, the reference section was according to MLA citation style.
Capital Budgeting Methods
The three most popular capital budgeting methods used by corporations are 1) net present value analysis, 2) payback period, and 3) internal rate of return.
Net present value (NPV) analysis evaluates capital projects based on their net present values which is computed by discounting, using the required rate of return, the project's yearly net cash flows to time = 0. With everything else equal and assuming that the company needs to finance just one project, the project with the highest net present value should be funded.
The payback period, on the other hand, evaluates capital projects based on a ...

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