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# Comparing advantages of NPV to IRR ARR and PP

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Please compare the advantage of using NPV instead of other evaluation methods such as (IRR, ARR and PP) in decision making.

#### Solution Preview

Compare net present value (NPV) to:

Accounting Rate of Return (ARR)
Payback period (PP)
Internal rate of return or annualized rate of return (IRR)

NPV, like IRR, incorporates the time value of money and that gives the decision-maker higher values for funds that are available sooner (for reinvestment). Without the time value of ...

#### Solution Summary

Your tutorial is 219 words and a reference and compares net present value (NPV) to Accounting Rate of Return (ARR), Payback period (PP), Internal rate of return, and annualized rate of return (IRR).

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## ARR, PP, NPV and IRR

A hospital is considering the purchase of new equipment. - Machine A and Machine B.

Machine A
has a cost of \$100000 and has an expected economic life of five years, after which it has a scrap value: \$ 25000. The after taz profits or losses for the next five years are (\$10,200), \$10000, \$30000, \$20000 and \$15000.

Machine B
Has an initial cash outlay of \$105000 with an economic life of five years and no scrap value. The annual after tax profits are expected to be \$14000 for each of the next five years.

The hospital requires a return on average assets employed of 18 % and has a cost of capital of 12%. Its also prefers projects that pay for themselves within three years.

Depreciation is always on a straight line basis.

1. Calculate: The ARR
The PP
The NPV
The IRR

2. Which machine is better investment and why?

3. Explain your preferred method of evaluating the investment merits of these machines.

4. Why cash flows rather than profit flow that used in the IRR, NPV and PP method of investment appraisal?

5. Why opportunity cost is important in capital investment decision?

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