An academic essay – fully referenced, addressing the following: Critically discuss the strengths and weaknesses of the following investment appraisal techniques: 1. Payback 2. Accounting Rate of...

Introduction
Capital budgeting is considered as a way of determining whether the company should invest in different investment proposals and projects or not. Capital budgeting can be said as the process of determining the viability of the long term investments which can include the purchase or replacement of the property, plant and equipment, introducing new line of business or other projects. The company uses the capital budgeting technique to establish whether the project will benefit the company or not. Will the benefits will outweigh the costs of investing in the project. There are different methods or techniques which are used by the companies to analyze the projects.
Capital Budgeting Techniques:
    Traditional or Non- Discounted Techniques
    Modern or Discounted Techniques
    1) Payback period Method
     1) Net Present Value Method
    2) Average Rate of Return Method
     2) Profitability Index Method
    
     3) Internal Rate of Return Method
    
     4) Discounted Payback Period Method
There are different techniques which are widely being used by the companies across the globe. As per the research, Rao Cherukuri (1991), major US companies prefer using IRR method to evaluate the project which is then followed by the net present value method. From the analysis, it came out that the companies always uses average cost of capital for measuring the risk sensitivity of the projects.
Payback period:
The Payback Period is one of the simplest technique to evaluate the proposal in which the initial cash flows is expected to be recovered from the cash flows of the company. It is one of the simplest method and simplest investment appraisal technique.
One of the biggest strengths of the payback period is its simplicity. It can also be used in analysing the risk that is inherited on the project. It also helps in analysing how certain the project cash flows are. It can be used widely by the companies who are facing liquidity concerns and problems, as it would help in analysing that how soon the company would be able to have the money back in hand.
One of the biggest drawback of the payback period is that it does not consider the concept of time value of money while analysing the project. As per Myers (1981), ‘Payback method is one of the easiest way which communicates the idea of profitability for the project’. It helps in giving a useful measure by determining how long it will take for the investment to be recovered from the cash benefits of the investment (Newnan, 2004). There is a discounted payback method as well which considers the time value of money and helps in analzying the time period in which the initial investment is recovered. In the discounted payback period, the cash flows are discounted to the...