Business – 10.3 Investment appraisal – Investment appraisal decisions | e-Consult
10.3 Investment appraisal – Investment appraisal decisions (1 questions)
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Answer:
| Technique | Cash‑flow Consideration | Time Value of Money | Risk Handling | Decision Rule | Main Limitation |
| Payback Period | Only cash inflows up to the break‑even point | No | Ignores risk; focuses on liquidity | Accept if payback ≤ required period | Excludes cash flows after payback and ignores time value |
| Accounting Rate of Return (ARR) | Based on accounting profit, not cash flow | No | Does not explicitly incorporate risk | Accept if ARR ≥ required rate of return | Relies on accounting data; ignores cash timing and tax effects |
| Net Present Value (NPV) | All projected cash inflows and outflows | Yes – discounted at the cost of capital | Risk reflected in the discount rate | Accept if NPV > 0 | Requires reliable discount rate and cash‑flow forecasts |
| Internal Rate of Return (IRR) | All projected cash flows | Yes – rate that makes NPV = 0 | Implicitly assumes risk via comparison with required return | Accept if IRR ≥ required rate of return | Multiple IRRs possible; ignores scale and reinvestment rate assumptions |