FINANCE FINAL 2
Terms
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- Advantages of Payback
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Easy to understand,
Works well with cash intensive business - Disadvantages of payback
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Arbitrary standard,
Does not use TVM,
Does not consider cash flows past the payback day - Advantages of Discounted Payback
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Easy to understand,
Works well with cash intensive business - Disadvantages of Discounted payback
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Arbitrary standard,
Does not consider cash flows past the payback day - Advantages of AAR
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Easy to understand
Information is readily available - Disadvantages of AAR
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Does not use TVM,
Uses accounting information,
Almost always overstates the true return - Advantages of NPV
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Uses all cash flows,
Uses TVM,
Has uniform decision rule - Disadvantages of IRR
- Answer is in terms of % ïƒ Can’t put % into bankAnswer is in terms of % ïƒ Can’t put % into bank
- Advantages of IRR
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Uses TVM,
Considers all cash flows,
Absolute decision process - Advantages and disadvantages of PI
- all same as PI