Buy custom The NPV rule is the best investment appraisal method
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| Topic: |
Business
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| Number of pages / Number of words: |
9 / 2293 |
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The discounted payback appraisal method requires a discount rate to be chosen to calculate the present values of cash inflows and then the payback is the number of years required to repay the initial investment. Yet payback can give misleading answers.
Project Year 0 Year 1 Year 2 Year 3
A -4,000 2,500 500 5,500
B -4,000 2,500 1,800 0
C -4,000 3,180 500 0
The cost of capital is 10% per annum
Project A
Year Net cash Discount factor Present Cumulative
flow at 10% values present values
0 -2,000 1...
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For example if the cut-off date is two years, project A although clearly the most profitable on the long term will be rejected. Thus if a firm uses the same cut-off regardless of project life then it will tend to accept many poor short lived projects and reject many good long lived ones.
Accounting rate of return
The accounting rate of return (ARR) is a simple measure sometimes used in investment appraisal...
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