Question

List and describe, and compare and contrast the four methods used in capital investment analysis

Answer 1

Payback period: In this we analyze in how much time company will payback the invested amount. It won't take cashflows after payback period.

Discounted payback period: Again we check in how much time company will payback the invested money. It also take time value of money in consideration and better than payback period for capital investment analysis. It won't take cashflows after payback period.

Net Present Value: Widely used methods for analysis of capital investment. Here company analyse the net present value of all the cashflows by discounting with required rate of return. If value is posistive then one should accept the project. It is best method for capital investment analysis.

Internal rate of return: It is a rate of return where net present value of the project will be equal to zero. If this return is more than required rate of return then one should accept the capital investment and vice versa. It is not give correct value if there is cash outflows in year after intial period. One should use marginal internal rate of return for better analysis of capital investment.