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

There are various tools available for analyzing capital investments, each with its own set of decision criteria, advantages and disadvantages. The most commonly used tool is the discounted cash flow (DCF) analysis which takes into account future cash flows at present value to determine whether an investment is viable or not. This method is useful because it allows investors to accurately calculate the time value of money by taking into account inflation and other factors. Other popular tools include internal rate of return (IRR), payback period and net present value (NPV).

The decision criteria used in DCF analysis typically involve discount rates, cost/benefit ratios and net income projections whereas IRR focuses on evaluating returns generated by a particular project or asset over certain periods; NPV on the other hand helps identify if given investment will increase its worth in long term or not.

Analyzing capital investments using these methods has several advantages such as providing clear insight into expected returns, aiding in better risk evaluations etc. 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.