A. Net present
value:
- ? 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.
- 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:
- 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.
- ?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:
- 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.
- 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.