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When considering new projects some business owners want to know how quickly they will earn their...

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Finance

When considering new projects some business owners want to knowhow quickly they will earn their money back (and use the Payback(PB) method or the discounted payback (DPB) method). Others want toknow what the rate of return on the project will be and use theInternal Rate of Return (IRR) method). Still others want to knowhow the project will affect the value of their business (and usethe Net Present Value (NPV) method).

Identify and describe the strengths and weaknesses of each ofthese four methods.

Which of them would you recommend as the best method? Explainwhy.

Answer & Explanation Solved by verified expert
3.7 Ratings (555 Votes)
NPV strengths 1 it factors in time value of money 2 It includes risk involves in generating cash flow 3 It is good in evaluating project involving large investment is of large scale projects 4 Here reinvestment rate is discount rate or WACC which is lower than IRR 5 It helps in ranking between projects Weakness 1 it is sensitive to    See Answer
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