– It ignores time factor

a) Payback period

– The payback period is the length of time required to recover the initial investments.

It is useful in investment at risky sector investments.

Mathematically ,

Pay back period = no of years preceding the final recovery + [Balance still to be recovered/      cash flow during the final year of recovery]

or, Pay back period = Initial investment/ Annual net cash return.

Decision criteria

– Accept any project that has minimum pay back period.

Merit:

-It is simple to calculate and easy to understand.

Demerit:

-Payback period has very limited economic meaning because it ignores the time value of money and the cash flows after the payback period.

b) Simple rate of return (SRR)

SRR= (Average annual net cash flow after financing / Investment amount) * 100

Decision criteria

i. SRR > RRR; accepted

ii. SRR= RRR; indifferent

iii. SRR< RRR; rejected.

c) Proceeds per unit of outlay

– It is calculated by dividing total net value of incremental production by the total amount of investment.

– So higher the proceeds per unit of outlay, the higher the economic feasibility of the investment or project.