Question

For all of the capital budgeting methodologies, what are the advantages and disadvantages using them as a financial manager?

Answer 1

Capital Budgeting Methodolies	Advantages	Disadvantages
Payback Method	This is one of the simplest method as one has to calculate shorter payback period	A)This Method suffers from One Dsadvantage that is it does not take into consideration the time value of money, hence when it comes to comarison between 2 or more projects , one might not be able to assess the best option B) This method also does not take into consideration the rate of Return and time value of Money
NPV	a)Time Value of Money is looked into this method thus it looks forward to maximizing the profits 2)Out of all Methods NPV is considered to most sought after and reliable	If the tenure of the project is high ,higher are the chances of error. B) Incorrect Estimation of Discount Factor can lead to misleading result
Discounted Payback	It calculates the Risk Involved in a project	Calculations are Complex especially when there are negative cash flows
IRR	Easy to interpret and since it take into consideration time Value of money , makes it more reliable	The assumptions that the cashflow will be invested ar IRR is not accurate
Profitability Index	When there are multiple projects involved, this helps to arrange in order of ROI.Accept/Reject decision are easy	the estimation of Cost of Capital is complex