MOD 4 CA FIN 301 Essay Example | Topics and Well Written Essays - 500 words

MOD 4 CA FIN 301 - Essay Example It provides results that are simple to comprehend. This is a very useful method for comparing projects of the same size mostly least cost situations. NPV enables the comparison of various rates of interest and also helps analyses what the earning would be if another project were taken up (Weston and Copeland, 1988). The main drawback in this method is that it does not take into account the profitability of a project. This is accomplished by computing profitability index (PI) for the projects and taking the decision accordingly. Hence it is essential that both NPV and PI are computed in order to be able to arrive at a profitable and most rational decision (Burke and Wilks). Internal rate of return on the other hand can be used to assess risk in all projects and it has an intuitive appeal. This method basis its calculations on the cash flows rather than on earnings. However it is not possible to have an accurate solution using this method since one project can have more than one IRR, with very extensive and complicated calculation