Question 9

Advantages
1) Simple to use and easy to understand
2) Determine the cash flows by using
available accounting data
3) Business decision makers can understand
model output easily
4) With a few exceptions, model output is on 3) There will be bias toward the short run if
an “absolute” profit/profitability scale and
allows “absolute” go/no-go decisions.
5) Some profit model can be used to calculate
the risk of project
Disadvantages
1) Excepting risk , all nonmonetary factors will be
ignored
2) Non discounting models will not consider
timing of the cash flows and the time–value of
money.
models reduce cash flows to present
4) Payback-type models ignore cash flows more
than payback period
5) Multiple solution can be resulted from the
internal rate of return model
6) In the early stages of project, the errors of input
data can be so sensitive

7) All discounting models are nonlinear, and the

effects of changes (or errors) in the variables or
parameters are generally not obvious to most
decision makers.

8) The way that the concept of cash flow is

properly defined for the purpose of evaluating
projects is not shown clearly

Question 8

Pay-back type model Discounted cash flow method

- Ignoring cash flows beyond the payback
period
- Not include discounting
- Ignore timing of cash flows and time-
value of money
- Consider the cash flows beyond the
payback period
- Include discounting
- Not ignoring the timing of cash flows
and time-value of money