While IRR base the value on rate of return, the ARR ignores the time value of money and it is not accounting based of return. Under ARR, depreciation is calculated in different methods such as accelerate or straight line, and the technique ignores the salvage value of the initial investment.
5. "Explain the relative significance of the unadjusted payback period in this decision situation."
Payback period assists in determining payback period in the life cycle of the project. Typically, it would be more than 8 years before NPV would become negative. However, the payback may not be useful in determining acceptance of a project because it ignores cash flow and does not consider time value for money after the payback in the life of a project.
Payback period is the time duration that is required to recoup the initial costs that has been committed in a project. The pay back period is the number of years that it will take cash flows from project to recover initial investment put in the project.
The relative significant of the unadjusted payback period in this situation is that payback period helps to determine the payback period in the project lifecycle. In the project, it would be more than 8 years before the Net Present Value (NPV) would be negative. Application of pay back is easy and it is easy to understand. Another significant of unadjusted pay back period is that it stress the period of recouping the investment put in the project.
The significant shortcoming of pay back period is that it ignores that cash...
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