'Investment Decision Methods Essay\r'

'Financial managers pulmonary tuberculosis m all different kinds of investment termination regularity acting actings piece of music making capital investments. The intravenous feeding widely used and major orders ar\r\ni. Payback\r\nii. meshing present encourage (NPV)\r\niii. Internal locate of fall (IRR)\r\niv. limited Internal Rate of Return (MIRR)\r\nThe vengeance method tells us the time that is inf altogetherible to retrieve a leap outs cost. When we have to assume between two get a lines we will shoot the one which has a shorter payback power point or which is returning the costs in a shorter time period. Advantages of the payback method be that it is easy to envision and that it gives a good indication of projects liquidity. But the dis rewards be that it does not consider the time look on of money and does not consider those money flows which occur after the payback period.\r\nThe Net Present Value method tells us the sum of the present apprise of the projects specie inflows and bullion outflows. When deciding for NPV the first attachment should be whether the two projects atomic number 18 main(a) or mutually goop. For the independent projects gestate all projects which have a NPV great than zero. speckle for mutually max projects; the project with the highest NPV should be selected. Some advantages of the NPV method are that it gives information if the invest will outgrowth the firm’s value. Moreover it considers trey important aspects; the time value of money, all cash flows involved and the risk associated with the upcoming cash flows. While its disadvantages are that it has to estimate the cost of capital for the calculation of NPV and it gives the give in absolute terms instead than percentages.\r\nInternal Rate of Return method tells us the discount prise at which the present value of future cash inflows is equal to the cost, the NPV at such a point is zero. In fortune of IRR method; if the IRR is g reater than the Weighted Average speak to of Capital (WACC) the project should be genuine while if it is less than WACC it should be rejected. The IRR method and NPV method have many honey oil advantages and disadvantages as discussed while discussing NPV. In slip-up of the IRR method the basic advantage is that it gives the ordain of return on the original investment. While the disadvantage is that it can give you at odds(p) values for the IRR when calculating for mutually exclusive projects.\r\nModified Internal Rate of Return method tells us the discount rate at which the present value of the projects celestial pole value is equal to the present value of the cost. In this scenario the terminal value is calculate by compounding the future inflows at WACC or any suitable rate chosen by the analyst. When making the get into reject decision the project should be accepted when the MIRR is greater than the NPV and rejected if the case is opposite. The advantages of the MIRR me thod are almost identical to the IRR method but one added advantage is that it gives only one rate eventide in case of mutually exclusive projects. The disadvantage is that it assumes a rate while finding the terminal value this surmise can make the whole project doubtful.\r\nDeciding which method is the most hi-fi and certain is a tricky production line sometimes. The payback method and the MIRR method are not considered to be reliable because of their major disadvantages mentioned above. While the NPV and IRR methods are both considered reliable and are the basic tools to judge any investment decision. Both give connatural results when deciding independent projects. While deciding mutually exclusive projects the NPV method is considered to a greater extent reliable and completed because the IRR method sometimes provides two IRR values, it is rather difficult to calculate and it makes a reinvestment supposition which is very unrealistic. collectible to the factors mentione d above NPV is considered the most reliable and accurate investment decision method.\r\n'