Which capital budgeting model considers both profitability and the time value of money?

The net present value (NPV) model is a key capital budgeting tool that takes into account both profitability and the time value of money. It does this by discounting future cash flows generated by a project back to their present value. By comparing this present value to the initial investment, NPV helps in determining whether a project will generate a net gain or loss.

Understanding the time value of money is crucial in capital budgeting, as it reflects the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity. Thus, NPV provides a more accurate picture of an investment's worth by accounting for the timing of cash flows, allowing decision-makers to evaluate the true profitability of projects. This makes NPV a powerful and preferred tool for making informed capital investment decisions.

Other models, such as the payback method and the accounting rate of return, do not adequately account for the time value of money. The payback method simply measures how long it will take to recoup an investment without considering the timing of cash flows or their present value. Similarly, the accounting rate of return focuses on accounting profits rather than cash flows and does not incorporate the time value of money in its calculations. The internal rate of return does