Describe three of the six decision models used in capital budgeting de

Describe three of the six decision models used in capital budgeting decision-making and briefly evaluate their effectiveness.

What will be an ideal response?

ANSWER

Answer:
Payback Period is simple and fast but economically unsound. It ignores all cash flow after the cutoff date and it ignores the time value of money.
Discounted Payback Period incorporates the time value of money but still ignores cash flow after the cutoff date.
Net Present Value is economically sound and properly ranks projects across various sizes, time horizons, and levels of risk, without exception for all independent projects.
IRR provides a single measure (return) but has the potential for errors in ranking projects. It also can lead to incorrect selection of two mutually exclusive projects or incorrect acceptance or rejection of a project with more than a single IRR.
Modified Internal Rate of Return, in general, corrects for most of, but not all, the problems of IRR and gives the solution in terms of a return.
Profitability Index incorporates risk and return, but the benefits-to-cost ratio is actually just another way of expressing the NPV.