How do companies typically compare competing projects?

Companies typically compare competing projects using capital budgeting techniques because these methods provide a systematic framework for evaluating the potential financial returns and risks associated with each project. Capital budgeting focuses on analyzing projected cash flows, assessing the time value of money, and determining metrics such as net present value (NPV), internal rate of return (IRR), and payback period.

These techniques help management make informed decisions by quantifying the expected benefits of projects relative to their costs, thus enabling a more objective comparison. Capital budgeting also incorporates various risk factors and the strategic alignment of each project with the company’s goals, making it essential for effective resource allocation. Additionally, using these methods supports long-term planning and investment decisions that can significantly impact a company's financial health and operational success.