Beyond NPV and IRR: An Integrated Capital Budgeting Rule for Real-World Investment Decisions
DOI:
https://doi.org/10.62051/a4ybws71Keywords:
Integrated Investment Rule; Real-World Decisions; Leverage & Tax Shields; Capital Rationing; Scenario Analysis; Unequal Life Project Comparison.Abstract
In making investment decisions, rational investors use rules to determine whether projects or assets are worth undertaking, taking into account the time value of money and risk. Prevalent investment rules include NPV, IRR, payback/discounted payback, the profitability index (PI), and “equivalent annual” methods; among these, NPV & IRR are the benchmark most commonly recommended. In this article, the following questions will be discussed: What is the better investment rule for investing in the financial markets - NPV or IRR? And is there an integrated investment rule that can be applied to multiple scenarios? Several essential financial indicators are incorporated to form a holistic investment rule that can provide comprehensive metrics when making investment decisions.
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