METHODS USED TO EVALUATE CAPITAL INVESTMENTS
|
Average
Rate of Return |
Easy
to calculate
Considers
accounting income (often used to evaluate managers) |
Ignores
cash flows
Ignores
the time value of money |
Cash
Payback
|
Considers
cash flows
Shows
when funds are available for reinvestment
|
Ignores
profitability (accounting income)
Ignores
cash flows after the payback period
Ignores
the time value of money |
|
Net
Present Value |
Considers
cash flows and the time value of money |
Assumes
that cash received from the project can be reinvested at the rate of
return
Necessary
to evaluate projects of unequal size using a present value index |
|
Internal
Rate of Return |
Considers
cash flows and the time value of money
Ability
to compare projects of unequal size |
Requires
complex calculations or trial-and-error methods
Assumes
that cash received from the project can be reinvested at the internal
rate of return |