Payback period
Amount time it takes for an initial investment to be repaid out of the net cash inflows from the project
Why are investment decision crucial ?
Large amounts of resources are often involved, but scale of investment varies from one business to another
Levels of capital investment are very high so need to be successful
ARR advantages
Measures profit
Calculations straight forward
Entire life of project taken to account
ARR disadvantages
Uses profit rather than cash
Averages misleading
Takes no account of the time value of money
Payback period advantages
Simple to calculate
Short term cash flows important to the company
Measure of liquidity
Payback period disadvantages
Ignores cash flows after payback periods thus a quicker repaying project may be chosen over slower however slow ultimately may be more profitable
NPV benefits
Takes into account all costs and benefits
Makes allowances for timing of costs and benefits
What is internal rate of return ?
Yearly percentage return an investment gives you
What type of IRR is selected ?
The higher one
