Further reading
l Conclusions on PBP:
lIt does not relate to shareholders’ wealth; ignores inflows after the payback
date.
lThe undiscounted version takes little account of the timing of cash flows.
lIgnores much relevant information.
lDoes not always provide clear signals and can be impractical to use.
lMuch inferior to NPV, but it is easy to understand and can offer a liquidity
insight, which might be the reason for its widespread use.Accounting rate of return (ARR)
l ARR =the average accounting profit from the project expressed as a percent-
age of the average (or initial) investment. The denominator needs to be
defined and the definition consistently applied.
l Decision rule: Projects with an ARR above a defined minimum are acceptable;
the greater the ARR, the more desirable the project.
l Conclusions on ARR:
lIt does not relate directly to shareholders’ wealth.
lIts use can lead to illogical conclusions.
lTakes almost no account of the timing of cash flows.
lIgnores some relevant information and may take account of some irrelevant
information.
lRelatively simple to use.
lMuch inferior to NPV.7.11 Use of CAPM in practice
l All four methods widely used.
l The discounting methods (NPV and IRR) show a strong increase in usage over
time.
l Many businesses use more than one method.
l Larger businesses seem to be more sophisticated than smaller ones.There are literally dozens of good texts covering topics discussed within this chapter, including
those by Brealey, Myers and Allen (2007), Arnold (2005), Drury (2004) and Atrill (2009), all of
which clearly and thoroughly deal with the basic principles of the investment appraisal tech-
niques. The report by Pike (1996), and the articles by Arnold and Hatzopoulos (2000) and
Alkaraan and Northcott (2006) provide very readable and interesting accounts of the research
evidence on investment appraisal methods used in the UK that was cited in this chapter.
Horngren, Bhimani, Foster and Datar (2007) give an interesting summary of the results of a num-
ber of surveys of appraisal methods used in nine different countries. Graham and Harvey (2001)
provide a very readable article reporting a major and far-reaching survey of business finance
practices (including investment appraisal) in the USA.