Payback period refers to the time required to recoup the funds from an investment. As a financial advisor it would be my job and responsibility to ensure I am fully aware of good and bad investments. If an investment might possibly take 20 years to break even that might cause the decision maker to reconsider that deal.
A discounted payback period gives the number of years it takes to break even from the initial expenditure. A firm would also benefit from knowing the exact length of time it would take to have a full return on an investment.
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period. Net present value is also used to for planning purposes, this planning will use analysis and budgets to know profitability potential.
The internal rate of return uses a metric to do an analysis to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
The modified internal rate of return would more than likely be used to make a correction or resolve some problem of the internal rate of return. This financial tool is used to determine an investment's attractiveness. Modified internal rate of return rank alternative investments of equal size.
The profitability index is another tool used to determine an investment attractiveness. This tool divides the present value of future cash flows by the initial investment amount.