1. Why Marginal Efficiency of Investment is Weak

1)The first disadvantage of MEI method is that, as an investment decision tool, MEI should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in.

2)There are certain investment projects whereby the MEI produces more than one interest rate. This involves those projects that have a mixture of negative and positive cashflows.This is because MEI provides the discount rate that enables a project to break-even. If market conditions change over time, the project will end up having more than one MEI.

3)IRR overstates the annual equivalent rate of return for a project whose interim cash flows are reinvested at a rate lower than the calculated IRR.

4)MEI does not consider cost of capital; it should not be used to compare projects of different duration.

5)MEI also uses a single discount rate to evaluate projects. This is a weakness because discount rates tend to change substantially over time. If not modified, MEI does not account for changing discount rates. This means that it is not effective for those projects that take a long time to complete and whose discount rates are expected to change.

2. Comparison of the PV and MEI Criteria

Similarities

1. Both favor projects that generate more returns in their early life.

2.Both put into consideration the concept of time value for money. It is a core principle of finance that asserts that if money can earn interest, any amount of money is worth more the sooner it is received.

3.Both are easy to use when making a decision regarding an investment. Present Value of cash flows needs to be positive for a project to be accepted, while MEI needs to be more than the discount rate provided for the investment to be accepted.

Differences

1.Present value criterion is effective when evaluating projects that have both positive and negative cash flows. MEI on its part generates more than one interest rate when there is existence of both negative and positive cashflows.

 2.The two criteria are different based on how an investment is deemed acceptable or not.. For the Present Value criterion, an investment is deemed appropriate if the PV is positive For MEI, it is compared with the existing discount rate. When the MEI is greater than the discount rate, then the investment is deemed viable.

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