Capital investment appraisal – advantages & disadvantage of ...
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Advantages: ➢ easy to calculate and to understand – it gives an immediate view on how long it will take to recoup an investment.
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MADM – CLASS RESOURCES Capital Investment Appraisal – Advantages & Disadvantage of Different Methods PAYBACK PERIOD Advantages: Easy to calculate and to understand – it gives an immediate view on how long it will take to recoup an investment Helps to identify how quickly the cash flow might become positive on the project – useful Less uncertainty/risk (the quicker that money is recouped, the less risk) Disadvantages: Ignores all cash flows after the payback period Ignores the timings of cash flows within the payback period Ignores the time value of money (i.e. money now can earn interest) ACCOUNTING RATE OF RETURN Advantages: Easy to calculate and easy to understand Relates to the profits shown in the annual accounts Takes account of profits earned over the entire life of the project Popular with some businesses because of its simplicity Disadvantages: Ignores the time value of money (i.e. money now can earn interest) Since it uses averages, it takes no account ...
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