Why do most companies prefer to use the present value or internal rate-of-return methods to value capital expenditures, rather than the payback method or average return on assets or equity methods?
The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Return on Assets (AAR), the Internal ...
This explains Discounting cash flow method and its benefits over other methods