Finance

GROUP 6

Ans 1) PP: As a CFO of a company, the payback period rule method can provide the exact years when this investment may payback to me, for example 2 years. We can see from the data clearly and compare the two investment plan easily. Although we are uncertain about the later cash flow, the method can adjust it. This method ignores the value change of the money as time flows. For example, the money for the investment is 200million dollars. But after 10years, the price in the market arises and the investment the project needs may turn to 2000million dollars. And this method biased against long-term projects or new projects. This method can calculate correctly the years when the investment can be paid back. In most time, the time period is 3~5 years. But the shout tome investment needs maximizing the benefits in the short time. This method cannot be used in this case.

DPP: this method includes the time value of the money, in other words, it thinks about the change of the amount of the investment. Just like the PP method, this method also can only be used in long-term project planning. This method doesn’t accept negative estimated NPV investment. But sometimes when the internal rate of return is greater than discount rate, the method also rejects them. But in this occasion, the plan of investment can be adopted. This condition may make the company lose good chances of investment.

IRR: this method can be easily understood and communicate. The data is very clear and it closely related to NPV. We can use it make the investment decision easily. But this may lead to incorrect decision because of the multiple answers. The method of calculating the IRR is easy but the outcomes are not sure to be accurate.

PI: this calculating method may relate to NPV. We can understand the method and make a good investment decision even the investment money are not sufficient. The calculating method and the data are not persuasive and easily lead to the...