Investment Appraisel Flashcards
advantages of ARR
simple to understand
widely used and accepted
it can be obtained from readily available financial accounting data
it considers the whole life of the project
disadvantages of ARR
ignoring timing of returns within the period
ignores the time value of money
is not a measure of absolute profitability
does not consider cash flows and uses subjective accouting profit, which include depreciation
advantages of payback
simple to understand
useful in situations like rapidly changing technology and imrpoving investment decisions
it favours quick return
used cash flows, not subjective accounting profits
disadvantages of payback
ignores the time value of money
is not an absolute measure and lacks objectivity
does not take into account cash flows beyond the payback period
advantages of npv
does consider the time value of money
is an absolute measure of return
is based on cash flows not profits
considers the whole life of the project
disadvanatges of NPV
fairly complex
not well understood by non finanacial managers
it may be difficult to determine the cost of capital
advantages of IRR
does consider the time value of money
considers the whole life of the project
considers cash flows
it can be calculated without reference to the cost of capital
disadvantages of IRR
it is not an absolute measure of profitability
complicated to calculate
interpolation only provides an estimate of the true IRR
Advantages and disadvantages of standard costing
Advs
annual detailed examination
performance appraisel
mangement by exception
simplifies bookkeeping
standards not updated
cost
unreasistic standards can demotivate staff
why do we use ratios
evaluate the overall performance of the business
provide a target return for individual projects
benchmark performance with competitors
