making investment decisions.
the three main investment decisions and the advantages and disadvantages corresponding to each one.
- Created by: Emma Cornhill
- Created on: 18-01-16 11:10
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- Investment Decisions
- Payback Period
- the time it takes for a project to repay its initial investment
- advantages
- easy to understand the results
- Simple and easy to calculate
- Disadvantages
- ignores cash flow after the payback has been reached
- does not look at overall project return
- takes no account of the time value for money
- may encourage short term thinking
- ignores qualitative aspects of a decision
- ignores cash flow after the payback has been reached
- Average Rate of Return
- looks at the total accounting return for a project to see if it meets the target return
- Advantages
- provides a percentage return which can be compared with a target return
- focuses on profitability- a key issue for shareholders
- disadvantages
- does not take into account cash flows- only profits
- may not be the same thing
- takes no account of the time value of money
- treats profits arising late in the project in the same way as those which might arise early
- does not take into account cash flows- only profits
- Net Present Value
- calculates the monetary value now of the projects future cash flows.
- Advantages
- reflects the time value of money, with earlier cash flows more important to decision
- looks at cash flows of all the projects
- has a decision making mechanism,- reject projects with a negative NPV
- Payback Period
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