This passage below require analysis and breakdown .

Capital budgeting involves choosing projects that add value to a company, a process where investors determine the value of this potential investment project. The three most common approaches to project selection are payback period (PB), internal rate of return (IRR), and net present value (NPV). The most effective of the three methods is the NPV, because this value shows how profitable the project will be. In NPV discounting the after tax cash flows by the WACC allows the project managers to determine whether the project will be profitable or not. In the NPV rule, all projects that have a positive net present value should be accepted and all projects with the negative net present value should be rejected. Thus simplifying the decision to: positive = accept and negative = reject. An important drawback of using an NPV analysis is that it makes assumptions about future events that may not be reliable. Which is one of the potential reasons that may drive a higher NPV, from assuming highest positive cash flow or lower discount rate. Therefore, managers should be careful in their assumption calculations and question NPVs that have really high or low values. In these cases managers can use IRR or PB to compare if they are questioning the values. Otherwise, if used correctly NPV provides a direct measure of added profitability to the company for proposed projects.