Explain the merits and demerits of the time adjusted methods ofevaluating of investment project?

Answer 1

MERITS OF TIME ADJUSTED METHOD

1. This method takes into account the entire economic life of an investment and income therefrom . It gives the true rate of return effected by a new project.
2. It gives due weight to time factor of financing. In the words of Charles Horn green : " Because the discounted returns on method explicitly and routinely weights the time value of money, it is the best method to use for long-range decisions."
3. It permits direct comparison of the projected returns on investment with the cost of borrowing money which is not possible in other methods.
4. It makes allowance for difference in the time at which investment generate their income.
5. This approach by recognizing the time factor makes sufficient provision for uncertainty and risk. It offers a good measure or relative profitability of capital expenditure by reducing the earnings to the present value.

DEMERITS

1. It involves a good amount of calculations. Hence it is difficult and complicated one . But this criticism has no force.
2. It is very difficult to forecast the economic life of any investment exactly.
3. The selection or cash - inflow is based on sales forecasts which is in itself an interminable element.
4. The selection of an appropriate rate of interest is also difficult.

But despite these defects, this approach afford an opportunity for making valid comparisons between several long term competing capital projects.