Finance Final Flashcards

Payback period strength

simple and fast

Payback period weakness

economically unsound because it ignores all cash flow after the cutoff date and it ignores the time value of money.

Discounted payback period strength

incorporates the time value of money

Discounted payback period weakness

ignores cash flow after the cutoff date

NPV strength

Economically sound and properly ranks projects across various sizes, time horizons, and levels of risk for all

IRR strength

provides a single measure (return)

IRR weakness

has the potential for errors in ranking projects. It can also lead to an incorrect selection when there are two mutually exclusive projects, or incorrect acceptance or rejection of a project with more than a single IRR.

MIRR strength

in general corrects for most of, but not all, the problems of IRR and gives the solution in terms of a return

MIRR weakness

The reinvestment rate may or may not be appropriate for the future cash flows

PI strength

incorporates risk and return

PI weakness

The benefits-to-cost ratio is actually just another way of expressing the NPV.