Density functional methods and conventional ab initio molecular orbital methods have been compared in an investigation of the model ligand substitution reaction Pd(N-O)(CH3)(PH3) + CO --> Pd(N-O)(CH3)(CO) + PH3 (N-O = NHCHCOO-). Full geometry optimizations were performed for each stationary point using a range of different basis sets, relativistic effective core potentials (RECPs), and levels of theory in order to ascertain a reliable and computationally inexpensive method for probing such reaction mechanisms. For geometries that compare well to experiment, electron correlation and double-zeta valence basis sets with d-type polarization functions on the main group elements are essential. Geometries determined using small-core RECPs and nonlocal density functional theory compared favorably with those produced at the second-order Moller-Plesset (MP2) level, and good agreement with available experimental data was observed. The density functional reaction energetics, however, were poor, apparently due to an unrealistically high Pd-CO binding energy relative to the Pd-PH3 binding energy. This error was reduced by the use of the Becke three-term hybrid exchange functional. The reaction barrier and reaction energy were predicted to be +15.0 kJ/mol and +5.1 kJ/mol, respectively, at the MP2 level with a medium basis set. Approximate large basis set CCSD(T) energetics were determined using an additivity scheme. This method predicted a stabilization of the 5-coordinate transition structure with respect to the 4-coordinate species, reducing the reaction barrier to +4.9 kJ/mol relative to the separated reactants. The associated reaction energy was +8.9 kJ/mol.