Which project appraisal criteria (NPV, B/C ratio, IRR) is best why?

– Decision only on Payback period because it does not consider time value of money.

– Decision making only on B/C ratio criteria does not hold good because it does not tell wealth generating capacity and size of the business.

– Used properly, the IRR will give the same result as the NPV for independent projects and for projects with normal cash flows.

–  Normal projects are projects with initial investment (negative cash flows) followed by a number of positive cash flows.

NPV is best due to following reason

– The NPV approach correctly accounts for the time value of money and adjusts for the project’s risk by using the opportunity cost of capital as the discount rate.

–  Thus, it clearly measures the increase in market value or wealth created by the project.

– Net present value is an absolute measure i.e. it represents the dollar amount of value added or lost by undertaking a project.

– IRR on the other hand is a relative measure of investment worth i.e. it is the rate of return a project offers over its lifespan.