Compare and Contrast Non-Time Value-Based Methods and Time Value-Based Methods in Capital Investment Decisions

Summary of the Strengths and Weaknesses of the Non-Time Value-Based Capital Budgeting Methods

Non-time value-based capital budgeting methods are best used in an initial screening process when there are many alternatives to choose from. Two such methods are payback method and accounting rate of return. Their strengths and weaknesses are discussed in Table 11.4 and Table 11.5.

The payback method determines the length of time needed to recoup an investment.

Payback Method

Strengths	Weaknesses
Simple calculation Screens out many unviable alternatives quickly Removes high-risk investments from consideration	Does not consider time value of money Profitability of an investment is ignored Cash flows beyond investment return are not considered

Table11.4

Accounting rate of return measures incremental increases to net income. This method has several strengths and weaknesses that are similar to payback period but include a deeper evaluation of income.

Accounting Rate of Return

Strengths	Weaknesses
Simple calculation Screens out many unviable options quickly Considers the impact on income rather than cash flows only (profitability)	Does not consider the time value of money  Return rates for the entire lifespan of the investment is not considered External factors, such as inflation, are ignored Return rates override the risk of investment

Table11.5

Because of the limited information each of the non-time value-based methods give, they are typically used in conjunction with time value-based capital budgeting methods.