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Discuss the differences, advantages and disadvantages between payback, IRR, ARR, and NPV. Two particular methods of comparing the attractiveness of projects have become known as the "traditional techniques". These are ARR (Accounting rate of return) and payback. I shall be discussing these first. Payback The payback period is the length of time (in years) it takes to recover the cash invested a project. A projects annual cash flows are used to determine the payback period. An example of how to calculate the payback period for a project that cost £570,000 is shown below. Annual Cash Flow Cumulative Cash Flow Year 1 £150,000 £150.000 Year 2 £190,000 £340,000 Year 3 £230,000 £570,000 The £570,000 invested is recovered in three years. A project is worth the investment if its payback period is less than or equal to a predetermined time scale in which it is given to pay for itself. So for example, if the three years it takes to recover the investment in the project example shown above...

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