Ekonomika a management widely used in industry, although there is little support for it among the academicians '; and Fisher and Nof [11, pp. 138] argue that the PB is a 'quick-and-dirty rule'. The two most serious disadvantages of the PB model of fi nancial appraisal are (i) it does not take any regard of returns after the payback period and, (ii) it ignores the timing of the returns.
The Discounted Payback Model (DPB)In order to overcome the timing of the returns issue of the conventional PB model, a discounted PB model was developed Rappaport [38]. In effect, the DPB is, but, a truncated version of the NPV -looking only at the discounted cashfl ows up to the payback period, and for this reason, it is not a measure of profi tability but simply, like the standard PB model, a measure of liquidity [31], [25]. However, it does take into account a company's cost of capital.
The Accounting Rate of Return (ARR)The ARR model attempts to equate the fi nancial data of a capital project with the accrual concept of conventional accounting. It is an attempt to measure the profi t and the capital cost on the same basis as that adopted in preparing the fi nancial accounts of the organisation. The ARR expresses the average return on the investment as a percentage of that investment. The fi gure for investment may be either the initial capital cost of the project (initial capital model, or return on original investment) or, based on the assumption that the cost of the project will reduce to zero or a predetermined residual/ scrap value over the life of the project by way of depreciation, one half of the capital cost (average capital model, or return on average investment). The ARR does not take fully into account the fact that profi ts may vary year by year and, therefore, show an uneven pattern; it ignores the time value of the fl ow of funds, and is not suitable for comparing projects with different life spans. Kee and Bublitz [22] argue that an attraction of the ARR is its simplicity and articulation with accrual accounting measures, by which managers are frequently evaluated. Kelly and Tippett [23] argue that since the ARR is based on book values it is easy to compute and readily understandable by its users. Some academics report that the use of the ARR is in decline [27], while others show that it is a popular model in appraising IT projects [2].
The Net Present Value (NPV)The literature repeatedly states that the NPV is the 'correct' investment appraisal model when looking to aim at maximising shareholder value, see for example Samuels et. al. [41] and Brealey & Myers [6]. The NPV of a project is the sum of all the net discounted cashfl ows during the life of the project less the present value of the capital cost of the project. A positive NPV indicates that if the project is accepted then the organisation's wealth will increase by this NPV. If the NPV is negative then the result will be a reduction in an organisation's net worth, while a zero NPV will result in no change.
The Profi tability Index (PI)Some academics s...