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3.8 INVESTMENT APPRAISAL (THE PAYBACK PERIOD (advantages (simple: fast to…
3.8 INVESTMENT APPRAISAL
THE PAYBACK PERIOD
initial investment cost/annual cash flow from investment
advantages
simple: fast to calculate
help with cash flow problems
less prone to accuracies
disadvantages
not consider cash earn after
ignores the overall profitability
annual cash flow affected
AVERAGE RATE OF RETURN
((total returns-capital cost)/years of usage)/capital costs x 100
advantages
show profitability over time
make use all of cash flow
easy comparisons
asses viability
disadvantages
forecasting errors
not consider the timing of cash inflows