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Which is the best technique for decision? 1. payback period 2. Discounted payback period 3. Net...

Which is the best technique for decision?

1. payback period

2. Discounted payback period

3. Net present value

4. profitability index

5. Internal rate of return

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Answer #1

NPV or Net Present Value is the best technique for taking investing decisions. This is because when compared with the other alternatives, it gives us more information and a clearer picture of the returns on our investments. Payback and discounted payback only tell us when we will get our money back and don't talk about the profit making opportunity in the investment. Profitability index is the ratio of payoff to investment. It doesn't tell us about the size of profits that can be made. IRR can sometimes give us two values and negative values. Hence, NPV method is the best technique.

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