What are the various tools for analyzing capital investments?  What are the decision criteria, advantages and disadvantages of each?

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You have many options for analysing capital investment. Each tool has its advantages and disadvantages. The DCF analysis, which considers future cash flows in present value to assess whether an investment will be viable, is most popular. Investors can use this method to determine the true value of money, taking into account inflation. Another popular tool is the internal rate of return, payback period, and net present value (NPV).

DCF analysis is based on discount rates and cost/benefit ratios. Net income projections are used as decision criteria. IRR focuses only on the return on investment over time. NPV helps to determine if a given investment will be more valuable in the long term.

This method provides many benefits, such as clear insight into anticipated returns and improved risk assessment. However there are some drawbacks as well – for instance DCF requires accurate forecasting data that may be difficult to obtain; similarly estimates obtained from IRR analysis can be misleading due to neglecting cash flows past initial investment horizon.

In conclusion, different types of analytical tools exist for assessing capital investments – each possessing unique features that makes them suitable for specific scenarios. Nevertheless no single approach should be considered foolproof – investors need to take into account all pros and cons before making any decisions.

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