Payback Method:The payback method is a method of evaluating a project by measuring the time it will take to recover the initial investment. In capital budgeting, the payback period refers to the period of time required for the return on an investment to œrepay the sum of the original investment. The merits of the payback period method are as follows:It is simple to apply, easy to understand, and of particular importance to business which lacks the appropriate skills necessary for more sophisticated techniques. This method is most suitable when the future is very uncertain. The shorter the payback period, the less risky is the project. Therefore, it can be considered as an indicator of risk. This method gives an indication to the prospective investors specifying when their funds are likely to be repaid. It does not involve assumptions about future interest rates. The payback period method suffers from the following drawbacks:It does not indicate whether an investment should be accepted or rejected unless the payback period is compared with an arbitrary managerial target. The method ignores cash generation beyond the payback period and this can be seen more as a measure of liquidity than profitability. It fails to take into account the timing of returns and the cost of capital. It fails to consider the whole life of a project. Therefore, the method ignores cash generation beyond the period when cash inflow exceeds investment is the Payback method. ARR: Accounting rate of return, also known as the Average rate of return, or ARR is a financial ratio used in capital budgeting. The ratio does not take into account the concept of the time value of money. ARR calculates the return, generated from the net income of the proposed capital investment. The ARR is a percentage return. NPV: In finance, the net present value or net present worth applies to a series of cash flows occurring at different times. The present value of cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money. IRR: Internal rate of return is a method of calculating an investments rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or financial risk.