This chapter reviews the NPV rule for capital budgeting. The NPV rule’s competitors—the book rate of return, the payback period and the internal rate of return (IRR)—are discussed. These methods have a number of shortcomings and therefore NPV comes out on top. It is shown that NPV is the most appropriate method, so long as the objective is to maximize value. Discounted payback and modified IRR methods are discussed briefly. The chapter ends with a discussion of capital rationing and profitability index (PI).
