Sophisticated capital budgeting techniques include Net present value (NPV), Internal rate of return (IRR), Profitability index (PI) and Equivalent annual annuity (EAA).

Comparing NPV and IRR

Theoretically, it is advisable to use Net Present Value method because NPV assumes that cash inflows are reinvested at cost of capital, which is more realistic than assumption made in Internal Rate of Return method (IRR) that cash inflows reinvested at IRR.

However, in real life, the IRR is more common because it considers the rate of return instead of dollar amount considered in the Net Present Value method and the former seems to be more intuitive to users of techniques. There are, however, ways to deal with shortcomings of IRR and therefore IRR is still can be considered a sophisticated and reliable technique.