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Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return,...

Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Which one of these is the most valuable from a financial point of view and why?

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Expert Solution

1.Net present value- this method helps to know the future value of the investment in near future, keeping in mind the discounting factor. The difference between the present value of inflow and the present value of outflow is the net present value of the investment.

2.Payback method- It helps to evaluate the time period in which the initial investment will be earned in future.

3.Profitability Index- is a way to rank the projects between various projects available to choose. It is the ratio of payoff to investment of a proposed project.

4. Average accounting return- is ratio between the average project earnings after tax and depreciation, and average book value of the investment during its life.

5. Internal rate of return- it is a interest rate of return at which the present value from all the projects is zero. This method is used to know the attractivness of the proposed project.

Net present value is the most suitable method for evalualating the projects from financial point of view, because it helps an investor estimating the returns that can be obtained from the proposed project, which is not possible by other mentioned methods.

jeff jeffy answered 1 year ago
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