"Question.\r\nExplain followings with the help of an imaginary example;\r\n•\tPay-back period method\r\n•\tPost pay-back profitability method\r\n•\tNet Present value method\r\nTable of Contents\r\nPay-back Period Method\t3\r\nPost Pay-back Profitability Method\t4\r\nNet Present Value Method:\t5\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n These all methods are used in taking investment based decision. For knowing whether a sum of money to be invested in a particular project or not, we normally test it with the help of different investment appraisal method.\r\nHere we are going to discuss these investment appraisal methods.\r\nPay-back Period Method\r\nIn this method, we see how early invested money is returned on a particular project.\r\nLow pay-back period project is preferred in comparison to high pay-back period project.\r\nFor Example:\r\nThere are two projects A and B.\r\nEach project requires Rs. 50,000 as investment money. Return in project A is Rs. 10,000 per annum while return in project B is Rs. 12,500 per annum.\r\nIn this case pay-back period is 5 years in project A while 4 years in project B thus project B should be preferred.\r\nMain Features:\r\n•\tEasy to understand and easy in calculation.\r\n•\tThis method requires less time and labour.\r\n•\tUnder this method, project having low pack-back period is accepted thus loss due to obsolescence is reduced.\r\n\r\nPost Pay-back Profitability Method\r\nThis method analysis the available investment options on the basis of post pay-back profits.\r\nFor Example:\r\nThere are two projects X and Y;\r\n\r\n\r\n\r\nProject X\t\tProject Y\r\nInitial investment required….Rs. 50,000 \tInitial investment required….Rs. 50,000 \r\nAnnual cash inflow…Rs. 10,000 \tAnnual cash inflow…Rs. 10,000 \r\nEstimated life…8 years\tEstimated life…10 years\r\n\r\nPost pay-back profitability for X =\r\nAnnual cash inflow (Estimated life – Pay-back period)\r\n= 10,000 (8- 5)\r\n= Rs.30,000.\r\nPost pay-back profitability for Y =\r\nAnnual cash inflow (Estimated life – Pay-back period)\r\n= 10,000 (10- 5)\r\n= Rs.50,000.\r\nAs per this method project Y should be accepted.\r\n\r\nMain Features:\r\nUnder this method profits after pay-back period are considered while analyzinginvestment options. \r\nAs after pay-back period profits are not considered in case of pay-back period method but these profits are also major player in deciding investment appraisal.\r\n\r\nNet Present Value Method:\r\nIt is a modern method of analyzing investment proposals. Under this method we mainly focuss on time value of money because value of one rupee in present is more than that of in future.\r\nPresent value is calculated yearly for cash inflow and cash outflow.\r\nFor Example:\r\n\tProject A\tProject B\r\nInitial investment\tRs. 10,000\tRs. 15,000\r\nEstimated Life\t5 Years\t5 Years\r\n\r\nThe Profits (In Rs.) are as follows;\r\n\r\n\t1\t2\t3\t4\t5\r\nProject A\t2,500\t5,000\t5,000\t1,500\t1,000\r\nProject B\t10,000\t5,000\t2,500\t1,500\t1,000\r\n\r\nIn above given example first of all we will calculate present value of net cash inflow year wise at a certain discount factor value then sum of discounted net cash inflow will be compared to its invested amount for analyzing both project A and B respectively.\r\nMain Features:\r\n•\tThis method gives substantial importance to time factor. This method is very worthy in case of uniform cash outflows but having uneven cash inflows.\r\n•\tThis method compare different project on the basis of actual profitability.\r\n"