In: Accounting
GCC uses the following criteria to make capital investment decisions:
Effect on earnings per share (must be positive)
Payback period (must be less than six years)
Internal rate of return (must be less than 12 percent)
Net present value (must be positive at a 12 percent discount rate)
1.1. What are the advantages and disadvantages of each of these measures? (5)
1.2. Why do you think GCC uses all of these measures rather than just one of them? (5)
EPS its the profit obtained by the company after tax but before the dividend preference share to the waighted averege number of outstanding ordinary shares during the period and its very usefull in measuring company performance and profitability in future.
advantages
EPS is very easly to compute its value and comparing with the privious period in performance
EPS its help in measuring performance of the company by bringing the sign indicators of company to continues with business
EPS it considering the time factor by taking the current time in measuring performance in relation to the extracted data
Disadvantages
Eps its difficult to obtain the exalt numbers of ordinary shars outstanding during the period.
EPS refers to previous information on making decision of performance of the organization in future where its seems that its not bring realistic due to the economic factors change
Advantages and disadvantages of payback method:
Some advantages and disadvantages of payback method are given below:
Advantages:
Disadvantages:
While useful NPV and IRR methods are useful methods for
determining whether to accept a project, both have their advantages
and disadvantages.
Advantages:
Disadvantages:
The Multiple IRR Problem
A multiple IRR problem occurs when cash flows during the project
lifetime is negative (i.e. the project operates at a loss or the
company needs to contribute more capital).
This is known as a "non-normal cash flow", and such cash flows will
give multiple IRRs.
Why Do NPV and IRR Methods Produce Conflicting Rankings?
When a project is an independent project, meaning the decision to
invest in a project is independent of any other projects, both the
NPV and IRR will always give the same result, either rejecting or
accepting a project.
While NPV and IRR are useful metrics for analyzing mutually
exclusive projects - that is, when the decision must be one project
or another - these metrics do not always point you in the same
direction. This is a result of the timing of cash flows for each
project. In addition, conflicting results may simply occur because
of the project sizes.