Module 9

Question 1

What are the advantages of payback?

Answer 1

• Simplicity in calculating payback
• Easy to see the length of time that the capital is at risk

Question 2

What are the disadvantages of payback?

Answer 2

• The time value of money is no taken into account
• There is a built in discrimination in favour of shirt term investments
• Cash flows after payback period are ignored
• Does not provide measurement of absolute gain in wealth of shareholders

Question 3

What are the advantages of ARR?

Answer 3

• This calcualtion is relatively straightforward
• One of the more easily understood techniqyes

Question 4

What are the disadvantages of ARR?

Answer 4

• The life of project is ignored (as uses averages)
• ARR does not account for the time value of money
• Does not provide a measurement of absolute gain in wealth of the shareholders

Question 5

What are the advantages of NPV?

Answer 5

• Time value of money is considered
• Relatively easily to calculate
• Measures the increase in shareholders wealth?

Question 6

What are the disadvantages of NPV?

Answer 6

• Concept of time value of money and the NPV itself can be difficult to understand
• only appropriate if the new investment is the same risk

Question 7

What are the advantages of IRR?

Answer 7

• When considering typical net cash flow patterns, IRR will give same conclusion as NPV
• Gives due consideration to the time value of money

Question 8

What are the disadvantages of IRR?

Answer 8

• Calculation is more difficult to ARR
• More than one IRR may be possible
• Not as useful when comparing IRR for different projects

Question 9

What should you choose if NPV and IRR conflict?

Answer 9

Always choose NPV!