1. Investment criteria. The Global Chemical Company (GCC) uses the following cri

Question

1. Investment criteria. The Global Chemical Company (GCC) uses the following criteria to make o make capital investment decisions: Effect on earnings per share (must be positive) Payback period (must be less than six years) 1. 2. 3. Internal rate of return (must be at least 12 percent)y 4. Net present value (must be positive at a 12 percent discount rate) a. What are the advantages and disadvantages of each of these measures b. Why do you think GCC uses all of these measures rather than just one o them?

Explanation / Answer

Advantage of using effect on EPS
EPS is what matters for the shareholders

Disadvantage:
It considers non cash items as well
EPS can become positive due to additional share funding as well

Advantage of payback:
Simple and cheap to implement

Disadvantage of payback:
Ignores time value of money
Ignores cash flows beyond the payback period

Advantage of IRR:
SHows return on money invested in percentage terms

Disadvantage of IRR:
Multiple IRRs possible
No IRR possible

Advantage of NPV:
Direct measure of dollar contribution

Disadvantage of NPV:
Project size not measured

All these measures are used because sometimes one measure is not sufficient and gives incorrect answers

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