Technical note: Equivalence of different profitability criteria with the net present value

Abstract

Abstract Net present value has long been regarded in academic circles as the best criterion for project appraisal; however, several alternative, complementary methods remain popular with practitioners. This paper demonstrates that, if properly applied, several of these standard criteria – such as net final value, internal rate of return, benefit–cost ratio, profitability index, equivalent annuity, discounted payback period and average payback period – lead to the same investment decision as net present value. Moreover, the paper proves that when choosing between two mutually exclusive projects, the application of these criteria to the difference project provides the same ranking as net present value. Therefore, although net present value is regarded as a superior investment criterion, any of these popular criteria, properly applied, serve as well.