NPV, ARR, IRR

1. FINANCIAL MANAGEMENT
Kanwaljit kaur Gosal
Regn . No. 12397027

2.  Firm’s decision to invest its current
funds most efficiently in the long
term assets in anticipation of an
expected flow of benefits over a
series of years

3.  Growth
 Risk
 Funding
 Irreversibility
 Complexity

4. METHODS
TRADITIONAL
1.ARR
2.PAY BACK PERIOD
TIME-ADJUSTED
1. NPV
2. IRR
3. NET TERMINAL
VALUE
4. PROFITABILITY
INDEX

5. MERITS



Simplicity
Accounting data
Accounting
profitability
SHORTCOMINGS



Cash flows ignored
Time value ignored
Arbitrary cut off

6. MERITS





Simplicity
Cost effective
Short term effects
Risk shield
Liquidity
SHORTCOMINGS
Cash flows after
payback
 Cash flows
ignored
 Cash flow
patterns


7. MERITS




Time value
Measure of true
profitability
Value-additivity
Shareholder value
SHORTCOMINGS




Cash flow
estimation
Discount rate
Mutually exclusive
projects
Ranking of projects

8. MERITS




Time value
Measure of true
profitability
Acceptance rule
Shareholder value
SHORTCOMINGS



Multiple rates
Mutually exclusive
projects
Value- additivity

9. MERITS



Time value
Value
maximization
Relative
profitability
SHORTCOMINGS


Cash flow
estimation
Discount rate

10. DCF are more popular
Multiple criteria (combination of
traditional and DCF)
 IRR – most frequently used(85%)
 NPV – widely used (65%)
 Payback period method (68%)

