Capital Budgeting Techniques (Summary)
| | Decision Rule | | | | |Method |Independent |Mutually Exclusive |Formula ffffffffffffffffffffffffffffffffffff |Advantagesffffffffff |Disadvantagesfffffffff | |Average Accounting Return|Accept the project if the|Choose the project with | |Easy to obtain data; Simple to |Accounting numbers, not cash flows | |(AAR) |average accounting return|the highest AAR | |calculate; Considers income over|and market values; | | |is greater than the | | |the life of the project |Ignores TVM; arbitrary benchmarks | | |target AAR. | | | | | |Payback Rule |Accept projects within |Choose the project with | |Simple to estimate; Clear |Benchmark payback usually | | |the target maximum |the shortest payback | |decision rule and simple to |arbitrary; ignores TVM; biased | | |payback period |period. | |interpret; Biased towards |against long-term/new projects; | | | | | |liquidity; Adjusts for |Ignores risk differences between | |...
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