fin 310 exam 2, advantages and disadvantages

NPV

advantages: lacks flaws of other investment criteria, measures how much value is created

payback period

advantages: easy to understand, adjusts for uncertainty of later cash flows, biased towards liquidity

disadvantages: ignores TVM, requires arbitrary cutoff point, ignores cashflows beyond cutoff date, biased against long term projects

discounted payback period

advantages: includes TVM, easy to understand, does not accept negative NPV investments, biased towards liquidity

disadvantages: may reject positive NPV investments, requires an arbitrary cutoff point, ignores cash flows beyond cutoff date, biased against long term projects

IRR

advantages: easy to understand and communicate, closely related to NPV often times leading to identical decisions

Disadvantages: may result in multiple answers or not deal with nonconventional cash flows, may lead to incorrect decisions in comparisons of mutually exclusive investments

crossover rate

helps determine which project is more favorable at different discount rates

Profitability index

advantages: closely related to NPV, often times leading to identical decisions, easy to understand and communicate, may be useful when available investment funds are limited

disadvantages: may lead to incorrect decisions when comparing mutually exclusive investments