Anonymous
Mar 27
Discuss the strength and weaknesses of the following tools in investment choice 1. Pay back period 2. Net present value 3. Internal rate of returns 4. Benefit cost ratio 5. Cost recovery factor ?
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Mar 27
1. Payback Period:
Strengths:
- Easy to understand and calculate
- Provides a simple measure of liquidity and risk
- Useful for comparing projects with similar risk profiles
Weaknesses:
- Ignores the time value of money
- Does not consider cash flows beyond the payback period
- Does not account for profitability or overall project value
2. Net Present Value (NPV):
Strengths:
- Considers the time value of money
- Provides a measure of profitability and value creation
- Allows for comparison of projects with different cash flow profiles
Weaknesses:
- Requires an estimate of the discount rate
- Can be sensitive to changes in the discount rate
- Does not account for the size or scale of the investment
3. Internal Rate of Return (IRR):
Strengths:
- Considers the time value of money
- Provides a measure of profitability and return on investment
- Allows for comparison of projects with different cash flow profiles
Weaknesses:
- Can result in multiple IRRs for projects with non-conventional cash flows
- Does not account for the scale or size of the investment
- Can be difficult to interpret for projects with complex cash flow patterns
4. Benefit Cost Ratio:
Strengths:
- Provides a simple measure of project profitability
- Allows for comparison of projects with different scales or sizes
- Accounts for both costs and benefits of the project
Weaknesses:
- Does not consider the time value of money
- Can be sensitive to changes in the discount rate
- Does not provide a measure of absolute profitability
5. Cost Recovery Factor:
Strengths:
- Provides a measure of how quickly an investment will pay for itself
- Useful for assessing the risk and liquidity of an investment
- Easy to calculate and understand
Weaknesses:
- Does not consider the time value of money
- Does not account for profitability or overall project value
- Ignores cash flows beyond the point of cost recovery
Strengths:
- Easy to understand and calculate
- Provides a simple measure of liquidity and risk
- Useful for comparing projects with similar risk profiles
Weaknesses:
- Ignores the time value of money
- Does not consider cash flows beyond the payback period
- Does not account for profitability or overall project value
2. Net Present Value (NPV):
Strengths:
- Considers the time value of money
- Provides a measure of profitability and value creation
- Allows for comparison of projects with different cash flow profiles
Weaknesses:
- Requires an estimate of the discount rate
- Can be sensitive to changes in the discount rate
- Does not account for the size or scale of the investment
3. Internal Rate of Return (IRR):
Strengths:
- Considers the time value of money
- Provides a measure of profitability and return on investment
- Allows for comparison of projects with different cash flow profiles
Weaknesses:
- Can result in multiple IRRs for projects with non-conventional cash flows
- Does not account for the scale or size of the investment
- Can be difficult to interpret for projects with complex cash flow patterns
4. Benefit Cost Ratio:
Strengths:
- Provides a simple measure of project profitability
- Allows for comparison of projects with different scales or sizes
- Accounts for both costs and benefits of the project
Weaknesses:
- Does not consider the time value of money
- Can be sensitive to changes in the discount rate
- Does not provide a measure of absolute profitability
5. Cost Recovery Factor:
Strengths:
- Provides a measure of how quickly an investment will pay for itself
- Useful for assessing the risk and liquidity of an investment
- Easy to calculate and understand
Weaknesses:
- Does not consider the time value of money
- Does not account for profitability or overall project value
- Ignores cash flows beyond the point of cost recovery
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