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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 ...