Undiscounted measure
– It ignores time factor
a) Payback period
– The payback period is the length of time required to recover the initial investments.
It is useful in investment at risky sector investments.
Mathematically ,
Pay back period = no of years preceding the final recovery + [Balance still to be recovered/ cash flow during the final year of recovery]
or, Pay back period = Initial investment/ Annual net cash return.
Decision criteria
– Accept any project that has minimum pay back period.
Merit:
-It is simple to calculate and easy to understand.
Demerit:
-Payback period has very limited economic meaning because it ignores the time value of money and the cash flows after the payback period.
b) Simple rate of return (SRR)
SRR= (Average annual net cash flow after financing / Investment amount) * 100
Decision criteria
- SRR > RRR; accepted
- SRR= RRR; indifferent
- SRR< RRR; rejected.
c) Proceeds per unit of outlay
– It is calculated by dividing total net value of incremental production by the total amount of investment.
– So higher the proceeds per unit of outlay, the higher the economic feasibility of the investment or project.