Compare and contrast the Internal Rate of Return (IRR), the Net Present Value (NPV) and Payback approaches to capital rationing. Which do you think is better? Why? Provide examples and evidence.
IRR is the discount rate at which NPV is 0.
NPV is the difference between the present value of cash outflow and inflow.
Payback period is period in which time value of money is not considered. It is the time period when the initial investment is recovered back.
Of all the three methods, NPV is the best as it is additive and subtractive. We do not have to calculate time and again the same values. The decision taken on this method are more accurate.
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