2.6.1 Static methods

The static capital budgeting methods are analysing average values per period.

Applying the cost comparison method the decision is in favour for the investment opportunity with lowest costs, whereas the profit comparison method favours the investment opportunity with highest profits.

The simple rate of return (ARR) or Return on investment (ROI) is calculated by dividing the return of an investment, i.e. earnings before interest, by the average of tied-up capital. The decision is in favour for the investment opportunity with an ARR higher than the investors expected minimum rate of return.

Static methods for capital budgeting have some advantages, which are their simplicity and quick results. On the other hand do static methods only consider "average periods" and time value of money is not considered.