Question

To prepare for this Discussion: Shared Practice, review the evaluation methods utilized by organizations for decision making. Consider your professional experience, and/or additional research. Evaluate the advantages and disadvantages of the various decision-making tools listed (e.g., regular payback, discounted payback, net present value (NPV), internal rate of return (IRR), and modified internal rate of return). Describe a project scenario in which you would recommend one method, or a combination of methods, as being more effective than others. Draw from your professional experience and/or additional research, and provide a rationale for your recommendation.

Answer 1

As per rules I will answer the first 4 subparts of this question.

Advantages and disadvantages of Payback method

Advantages

1. It is simple to use.

2. It can be easily understood and identified with.

3. It is easy to identify the projects that provide the fastest payback.

4. This method is useful for small projects which involve small amount of investment.

Disadvantages

1. It ignores the time value of money.

2. The focus is on short term profitability and can only be used as an initial screening tool.

Discounted payback method

Advantages

1. This is an improvement over the payback method and takes into account the time value of money.

2. It determines the actual risk of the project.

Disadvantages

1. This method does not determine whether the investment will result in an increase in the value of the firm or not.

2. The computation may become complex if there are too many negative cash flows.

NPV method

Advantages

1. The biggest advantage of this method is that it takes into account every cash flow.

2. It considers the time value of money.

3. It determines the net change in the value of the company.

Disadvantages

1. It requires estimation about the cost of capital which is difficult to determine

2. It ignores the size of investment.

IRR method

Advantages

1. It depicts the return on original investment.

2. It takes into account the time value of money and the timing of cash flows in future years.

3.It is a relatively simple method.

Disadvantages

1. It ignores the size of the project while comparing different projects.

2. It ignores the reinvestment rate of interest