I) Simple rate of return :
– Express average annual net income as % of the initial amount invested in the projet.
SRR = Y-D / I
where , Y = Average annual net income
D= Annual depreciation
I= Initial investment
SRR> required rate of return , project accepted.
ii) Pay back period :
– Length of time required to recover the initial investment .
Pay- back period = Initial investment / annual cash flow.
– Shorter the pay back period , project is beneficial , hence accepted.
a) Simple in both concept an evaluation.
b) Rough and ready method for dealing with the risk.
a) Fails to reconsider time value of money.
b) Ignores cash flow beyond pay back period.
Iii) Proceeds per unit of outlay :
Proceeds per unit of outlay = Total value of incremental production/ Total amount of investment
iv) Break even analysis :
– Point at which , company is neither at profit nor at loss.