[shortie]

Paycheck, net present value, profitability index and internal rate of return, which of the processess is better and why?

[sachintholia]

Hello shortie,
Hope you are doing well ,first let me tell u , please confirm its not paycheck but payback. I will give the major diff keeping in mind that you are aware of basic terms
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The payback method simply measures how long (in years and/or months) it takes to recover the initial investment.

Project having lowest pay back period is selected in mutually exclusive projects
This method is used when recovery of capital is important, or urgency is the issue and not the earnings
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IRR Vs NPV
On a purely theoretical basis, NPV is the better approach because:
– NPV assumes that intermediate cash flows are reinvested at the cost of capital whereas IRR assumes they are
reinvested at the IRR The assumption that you can reinvest at the IRR rate is most likely to send misleading signals when the computed IRR differs sharply from a realistic estimate of the market rate of interest and also where the project lives are different.
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Profitabilty Index method is just an alternate way of NPV, both give the same results, but PI is used to give ranking to various mutually exclusive projects, PI talks in terms of relative advantage while NPV talks in absolute advantage. In problems related to Captial Rationing PI is used
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I have tried to make it clear , if you still have the doubts , i would love to clear them


sachin