Assume you are the new financial
manager of the bed mattress firm, Fairy Tale Lullaby Ltd. The firm...

Question

Assume you are the new financial
manager of the bed mattress firm, Fairy Tale Lullaby Ltd. The firm has always
used payback period and accounting rate of return to appraise new investments.
With your trusty copy of ‘Corporate Finance’ to hand, you believe that other
methods may be more appropriate for the firm. Write a report to the owners of
Fairy Tale Lullaby Ltd reviewing the different methods that can be used in
investment appraisal together with their strengths and weaknesses. Comment on
any practical issues that Fairy Tale Lullaby may face in implementing these
methods.

Prince · Accepted Answer

Investment assessment is a method by which a firm evaluates the allure of a certain potential project or investment based on the results of several capital budgeting & investment strategies.
Payback period, NPV, ARR , Profitability index, and internal rate of return are the most used forms of investment appraisal tools.
The payback period is the length of time it takes for an initiative to recoup its costs. The payback time method has the advantages of being easy to compute and comprehend, concentrating on how quickly money may be recovered from an investment, and having a liquidity focus. Payback period's flaw is that it disregards the time value of money. Cash flows received earlier in the project's lifecycle are considered more important than those received later.
The accounting rate of return calculates the net net income as a proportion of the capital investment. The ARR has the advantages of being simpler to compute than some other capital investment strategies and having access to the necessary data. The accounting rate of return has several flaws, including the inability to be fully justified as a rate of return due to the disregard of time value,

Assume you are the new financial manager of the bed mattress firm, Fairy Tale Lullaby Ltd. The firm has always used payback period and accounting rate of return to appraise new investments. With your...

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