Discuss the advantages/disadvantages of using payback period in project evaluation. Discuss why NPV is considered to be a superior method of evaluating cash flows from a project. Discuss the essential...

Question: Discuss the advantages/disadvantages of using payback period in project evaluation There are
many advantages and disadvantages of the using this method. Those are as below
Advantages
 It is easier to calculate
 It is simple to understand and interpret.
 It exactly provides information about the expected times period to recover the cost of the
project.
Disadvantages
 This method is based on expected cash flows and the real cash flows may vary from the
expected.
 Inflation is not considered in calculation of payback period and the real payback period is
always longer than the calculated if the adjusted for the inflation.
 Discuss why NPV is considered to be a superior method of evaluating cash flows from a project.

Question: There are many reasons because of which the net present value method is
superior to many other methods. Those are as below:
 The present values of the cash flows are a
ived using a discount rate that considers the
inflation factor in the calculation of the value of cash flows. Then the net present value is
a
ived upon by adding those cash flows.
 In calculation of the present values, time is an important part. So the values are adjusted
with the time.
Question: Discuss the essential difference between Sensitivity Analysis and Scenario Analysis.In case of
sensitivity analysis, how the uncertainty in the output of a model can be apportioned to different
sources of uncertainty in the model input is studies. So it exactly helps to understand the impact
of various factors and sources of risks on the final result or output. While in case of scenario
analysis, various alternative possible outcomes are considered. So in this case one does not get
one exact picture of possible future but various possible pictures and alternatives in hand. So it
can be said the sensitivity analysis provides exact and single picture but the scenario analysis
provides many possible pictures of future.
Question: Discuss the option to abandon and the option to expand. Explain the effect on NPV if we ignore
these options
In many cases it happens that firms find it less profitable or worthless to continue the operations
of some units. So instead of continuing the operations, firms decide to stop and abandon the
operations. This is called option to abandon. In some cases firms find it better not leave the units
as there are instead of scraping because of high costs involving.
In many cases, firms find that the demand for the products and services are growing and are
expected to grow in future too, so to satisfy the growing demands, the firms decide to expand the
operations of the units. This decision is known as...