Cash payback method:
Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.
Average rate of return method:
Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.
The average rate of return is computed as follows:
Net present value method:
Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.
Present value index:
Present value index is a technique, which is used to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.
The present value index is computed as follows:
To determine: The cash payback period for the given proposals.
To indicate: The proposals which should be accepted for further analysis, and which should be rejected.
To determine: The present value index for each proposal.
To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.
To rank: The proposal from most attractive to least attractive, based on the present value of index.
To analysis: The proposal which is favor to investment, and comment on the relative attractiveness of the proposals based on the rank.
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