Investment Appraisal Flashcards
Advantages of the accounting rate of return method
It is easy to understand and simple to calculate.
It is compatible with a similar accounting ratio.
It draws attention to the overall profit.
Disadvantages of the accounting rate of return method
Profit for the year can be subject to different definitions.
No guidance is given as to what is a good acceptable rate of return.
The benefit of high profits in earlier years is not accounted for.
Where the time scales are different, this method is unreliable.
Advantages of the payback method
Easy to understand and simple to calculate.
Allows comparison of mutually exclusive projects.
Favours quick return projects which may produce faster growth for the business.
Quick return projects aid the business liquidity position.
Disadvantages of the payback method
Does not measure profitability, only cash flow.
Ignores cash inflow after the payback period.
Time value of money ignored.
