Explore BrainMass

criteria to evaluate invemestments

1.Besides net present value (NPV) and internal rate of return (IRR), what other criteria do companies use to evaluate investments?

2.What are he disadvantages of NPV as in investment criterion
3.How will the change in cost of capital impact the investment decision process?

See attached files.


Solution Preview

In addition to NPV and IRR, companies often use the Payback Rule. This Rule is simple to employ, which lends to its popularity. Essentially, it determines whether an investment will earn a return, or at least pay for itself, in a certain amount of time. The Payback Rule lacks

Firms may also use average accounting return (AAR). This is a benefit/cost ratio that produces a pseudo rate of return by dividing the average net income by the average book value. A project is considered acceptable if its AAR return exceeds a target return. However, due to lack of risk adjustment and the use of profits rather than cash flows, this method is seriously flawed.

The profitability index may also be utilized. It is ...

Solution Summary

Different methods to evaluate whether investments should be undertaken