Answer:
Payback period, internal rate of return, and net present value are methods of evaluating a capital investment project that uses cash flows as a measurement basis. Payback period does not use the present values. Meanwhile, internal rate of return and net present value use the present values.
Explanation:
Here’s the definition of each method:
· Payback period: used to regulate how much asset is back after the first saving
· Internal rate of return: used to measure potential earnings from a stock
· Net present value: used to regulate the value of all the company's assets
Furthermore, there are two methods available for the Evaluation of Capital Investment:
1. Methods That Use Present Value
Methods using present values take into account the time value of money in the capital investment analysis. These methods include the net present value method and the internal rate of return method. The idea is that the cash has significance over time because the money can be invested to earn interest revenue. Today, a dollar in hand is more important than a dollar to be received next year.
2. Methods That Ignore Present Value
These methods, which consist of average return method and payback method, are originally used by management to screen proposals. If a proposition meets management's minimum requirements, it will be subject to further assessment otherwise it will be removed from the further account.
Methods that ignore present values are usually used to evaluate capital investment proposals that have remarkably short useful lives. In such cases, management focuses on the expected revenue from the investment to be earned and the total net cash to be obtained rather than the timing of the cash flows. A combination of methods is usually used to assess proposals for capital investment.
LEARN MORE
If you’re interested in learning more about this topic, we recommend you to also take a look at the following questions:
• What is meant by the term payback period? brainly.com/question/12484157
• When comparing the net present values of projects, all things being equal, the project with the lowest net present value is the best investment.? brainly.com/question/2587483
Keywords :
methods of evaluating a capital investment project use cash flows as a measurement basis, which methods of evaluating a capital investment project use cash flows as a measurement basis
Subject : Business
Class : College
Sub-Chapter : Accounting
