All 34 Capital Budgeting questions
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Budgeting & Forecasting › Capital Budgeting

Why is NPV considered superior to payback and ARR?

Intermediate

Answer

NPV accounts for the time value of money, uses all relevant cash flows over the whole life, and measures the absolute value added in money terms, aligning directly with the goal of maximizing shareholder wealth. Payback ignores time value and later cash flows; ARR uses profit not cash and ignores time value. Hence NPV is the theoretically preferred method.
Real-world example NPV is chosen as the primary criterion because it directly measures value added, unlike payback or ARR.

Common follow-ups: What do payback and ARR each ignore? | Why does NPV align with shareholder wealth?

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All 34 Capital Budgeting questions