Finance 301 Exam

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FINANCE EXAM 301

1.Payback period
Advantages
Easy to use
Can be used with other capital budgeting techniques
Considers the risk of investment
Disadvantages
Does not consider the time value of money concept: does not discount cash inflows Does not consider cash inflows after the original investment is recovered Does not measure the profitability of a project

Does not effectively evaluate projects with small cash inflows in the beginning and large cash inflows later on

Profitability Index
Advantages
Considers the time value of money.
Considers analysis all cash flows of entire life.
makes the right in the case of different amount of cash outlay of different project. Ascertains the exact rate of return of the project

Disadvantages
It is difficult to understand interest rate or discount rate. It is difficult to calculate profitability index if two projects having different useful life.

Internal Rate of Return
Advantages
It is good method of capital budgeting in which we give equal importance to all the cash flows not earlier or later. There is no base for selecting any particular rate in internal rate of ret Maximum profitability of Shareholder

In this method, we need not to calculate cost of capital because without calculating cost of capital, we can check the profitability capability of any project.

Disadvantages
Not Helpful for comparing two mutually exclusive investment
It must assume the discount rate or cost of capital. However, this could change each year as market conditions change. Financial analysts have no way of accurately predicting this future rate.

Net Present Value
Advantages
That it is a direct measure of the dollar contribution to the stockholders. Gives important to the time value of money.
In the calculation of NPV, both after cash flow and before cash flow over the life span of The project are considered. Profitability and risk of the projects are given high priority. Helps in maximizing the firm's...
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