Profit related measure – profit is the most often reported figure for company performance
1 of 9
Average Rate of Return -
Ignores cash flows. Ignores the impact of the time value of money. Calculation is more judgemental – significantly affected by how the figure for capital invested is calculated
2 of 9
Payback Period +
Is of most relevance where the company has liquidity or financing constraints.
3 of 9
Payback Period -
Ignores cash flows once the payback date has been reached. Simple payback ignores the effect of the time value of money
4 of 9
Net Present Value +
Discount rate applied represents the minimum acceptable return for the investor. Allows for timing of cash flows. Takes account of the entire cash flow of the project and treat the cash flows differently according to their date of occurrence.
5 of 9
Net Present Value +
Considers time value of money. Output of the analysis has a direct bearing on the wealth of the owners of the business
6 of 9
Net Present Value -
Unknown inflation rates guessed at. Unknown interest lost guessed at. Extent of risk unknowns. Difficult to select the most appropriate discount rate. Not useful to compare two projects of different size
7 of 9
Internal Rate of Return +
Gives a % “return” figure. Allows for timing of cash flows. Takes account of the entire cash flow of the project and treat the cash flows differently according to their date of occurrence. Considers time value of money
8 of 9
Internal Rate of Return -
Less flexible (and perhaps meaningful) than NPV. Does not tell us the scale of the investment. Does not directly address wealth maximisation. Has difficulty with unconventional cash flow
9 of 9
Other cards in this set
Card 2
Front
Average Rate of Return -
Back
Ignores cash flows. Ignores the impact of the time value of money. Calculation is more judgemental – significantly affected by how the figure for capital invested is calculated
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