Investment analysis Identify one primary strength and one primary weakness for each of the following methods...

Investment analysis Identify one primary strength and one primary weakness for each of the following methods of investment analysis: A. Net present value B. Internal rate of return C. Payback Please explain in depth.

Expert Solution

A. Net present value:

Strength

? NPV gives the importance to the time value of money. It consider the profitability and risk of the project. It helps in maximizing the value of firm.

Weakness:

NPV cannot give the accurate decision if amount of investment of mutually exclusive projects are equal. It is difficult to calculate the appropriate discount rate.

B. Internal rate of return:

strength:

The profitability of the project is considered the entire economic life of a project. In this true profitability of the project is evaluated. It gives much importance to the objective of maximizing the shareholders wealth.

Weakness:

?This method assumes that the earnings are reinvested at the internal rate of return for the remaining life of the project. If average rate of return earned by the firm is not close to the IRR. So the profitability is justifiable.

C. Payback:

Strength:

The most significant advantage is its Simplicity. It is easy to compare the several projects and then to take the project which has shortest payback period.

Weakness:

The most serious disadvantage of the payback method is that it does not consider the time value of money i.e. ignore the time value of money.

jeff jeffy answered 3 years ago

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