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CAPITAL BUDGETING, n, t =1, accept projects with the shortest payback…

- - - - ADVANTAGES
        
        Easy to calculate
        
        Liquidity indicator
        
        Risk indicator
      - DISADVANTAGES
        
        Ignore time value of money
        
        Ignores cash flows occurring after payback period
        
        Bad profitability indicator
        
        Biased against the long term project
      - decision criteria
        
        independent
        
        if its payback period is less than or equal to the firm's maximum desired payback period
        
        mutually
  - - - relative measure that shows the present value of cash flows earned per Ringgit of initial cash invested
      - decision criteria
        
        mutually
        
        accept the projects with the PI > 1
        
        independent
        
        both project if PI for both projects > 1
    - - using formula
        
        NPV = ∑ CF - Initial Outlay
        
        n
        
        t =1 (1 + i) t
      - using PVIF table
        
        NPV = ∑ CF(PVIF i,n) - Initial Outlay
      - ADVANTAGES
        
        It uses cash flow
        
        It recognizes time value of money
        
        It is consistent with the firm’s goal of shareholder’s wealth maximization
      - DISADVANTAGES
        
        requires detailed long term forecast of incremental benefits and costs
      - decision criteria
        
        independent
        
        both projects if NPV>/ 0(+)
        
        mutually
        
        accept projects with highest NPV
    - - will determine the return that will make the NPV = 0 or > 0 (+)
      - decision criteria
        
        independent
        
        accept - both project if IRR for both project > required rate of return
        
        mutually
        
        accept the projects with the highest IRR
      - ADVANTAGES
        
        use cash flow & recognizes time value of money
      - DISADVANTAGES
        
        requires detailed long term forecast of incremental benefits and costs
- - - - projects where decision is made to choose only one project from the many being considered
        
        the decision to accept one will automatically rejection of others
    - - the decision to accept on project will not affect the decision to accept another