Read the following statement and respond to why you agree or disagree?

	(a) Net Present Value	(b) Profitability Index	(c) Internal Rate of Return	(d) Payback Period	(e) Average Rate of Return
1st preferred	C	A	B	C	D
2nd preferred	B	C	A	A	A
3rd preferred	A	B	C	D	B
4th preferred	D	D	D	B	C

Net present value observes the difference of cash flows in a given period, especially the value of inflow and outflow. Its usefulness for capital expenditure appraisal is that positive or negative cash flow can be calculated quickly, where positive would indicate a profitable investment and negative not profitable.

The profitability index also uses cash flows to measure profitability. The information, however, is provided as a ratio. The focus is asking what the present value of future cash flows is. The balance is based around the number 1, where anything over 1 is profitable, and anything under it is not.

The internal rate of return is the annual return on an investment presented as a percentage. The higher the ratio, the more profitable the investment is. This is useful because it allows organizations to observe different projects short-term, or less than one year.

The payback period is measured in time and observes how long it would take to make 100% of the initial investment back, also known as the break-even. This is an excellent method when operating on a timeline, where projects may be worked simultaneously or one after the other. It also sheds light on an organizations' threshold for investing at any given point, minimizing risk, among other things. The result is consistent returns over time.

The average rate of return is similar to the internal rate of return in that it is presented as a percentage. This percentage, however, does not use cash flows to make this calculation. IT is a quick method to measure return compared to the initial investment. If time is of concern, this would be the faster calculation. Ironically, ARR does not account for the present value of the investment if it were to go to another project.

Each method has its strengths and weaknesses and should be used in a manner that is efficient for the organization, given past, current, and future circumstances. It also depends on emerging trends that dictate the course of business and could cause a "Blanket effect," where the change in the vast majority in investment behavior can be seen across multiple industries. In one example, we can see how advancement in IT influenced behavior in the 90s/

"The fact that there is also evidence of a possible shift in emphasis towards NPV suggests rather more simply organizational change fuelled by the growth of information technology is the cause" (Sangster, 1993).

Reference:

Sangster, A. (1993).Capital investment appraisal techniques: A survey of current usage(Links to an external site.).Journal of Business Finance & Accounting, 20(3), 307-332. https://doi.org/10.1111/j.1468-5957.1993.tb00258.x