A well-known university sponsors a continuing education program for engineers. One of its programs is called ‘‘Evaluating Project Alternatives by Discounted Cash Flow.’’ The advertising copy for this program says, in part:
Why You Should Attend Traditionally, a large percentage of business decisions have been based solely on payback, which is the amount of time before the cash inflows from a project equal the cash outflows. Although the payback method has the advantage of computational simplicity, it is not a true measure of life-cycle cost effectiveness and can lead to erroneous accept-reject decisions.
Why Use Net Present Value
(1) Takes into account
Cash flows beyond the payback period.
Timing of cash flows within the payback period.
(2) Does not discriminate against long-lived projects.
(3) Does not ignore the time value of money.
(4) Provides for
Return of and on debt and equity capital for a particular project.
Income taxes, income tax write-offs.
Inflation.
Costs that escalate at a rate greater than the rate of inflation.
(5) Permits an accurate ranking of alternatives.
(6) Gives correct choice among independent alternatives.
(7) Maximizes return on investment.
Comment on the numbered points from the copy.