Question

What are the advantages of evaluating projects using the net present value and internal rate of return methods instead of the payback and accounting rate of return methods?

Answer 1

The payback period strategy has some key shortcoming that the NPV technique does not. One is that the payback period method doesn't consider expansion and the expense of capital. It basically compares $1 today with $1 sooner or later, when in certainty the obtaining influence of cash decreases after some time. Another is that the payback period method overlooks all money streams past the time skyline - and those money streams might be considerable. Enormous moneymakers, all things considered, some of the time require a significant stretch of time to go ahead.

The net present value strategy assesses a capital task as far as its budgetary return over a particular era, though the restitution technique is worried about the time that will pass before an undertaking reimburses the organization's underlying venture. In contrast to the NPV technique, the payback method neglects to represent the time value of cash or undertaking hazard, yet rather expect every single monetary part of a venture will advance as arranged. Furthermore, the payback methid neglects to consider income after the payback period. The NPV and payback assess a venture in money related as opposed to speculation terms, which blocks thought of undertaking advantages, for example, access to new markets or the procurement of existing offices. Therefore, it might be fitting to assess ventures utilizing in excess of one capital-speculation assessment instrument.

Accounting Rate of return utilizes working benefit as opposed to money streams. Some capital speculations have high upkeep and support costs, which cut down benefit levels.

2. In contrast to NPV and IRR, it doesn't represent the time value of cash. By overlooking the time value of cash, the capital speculation under thought will seem to have a larger amount of return than what will happen as a general rule.