Asif
10-03-08, 10:37 PM
Modern Investment appraisal technique are :
- ARR Accounting Rate of Return
- IRR - Internal Rate of Return
- Payback period \ Discounted payback period
- NPV
- Profitability Index
1 ARR Adv :
- Simple and easy to calculate
- Information is readily available since it uses accounting profit unless NPV or or IRR which needs to be discounted.
- It accounts the entire accounting profit throughout the projects life
IRR
- considers time value of money
- Non financial manager understand it
- Congruent with wealth maximization of shareholder (since it takes account of opportunity cost)
- entire project cash flow is considered
Pay back-
- Very simple and ez to calculate
- Cost effective (less hassle is required)
- Risk is considered (Since its tells the investor when they will be 'paid back')
- Liquidity may be improved if used, if company sets shorter payback level )
Discounted Pay back :
-same as above , but takes account of time value of money
NPV (Net present Value)
- Most scientific and logical appraisal technique
- Time value is considered
- Congruent with Shareholders wealth maximizations objective
- cash flow of entire project is taken into account
- Risk of specific project can be adjusted by increasing cost of capital (if the project is risky, or lowering the cost of capital if it is less risky)
Only Advantages are mentioned. There are limitation and disadvantages of each of the techniques.
- ARR Accounting Rate of Return
- IRR - Internal Rate of Return
- Payback period \ Discounted payback period
- NPV
- Profitability Index
1 ARR Adv :
- Simple and easy to calculate
- Information is readily available since it uses accounting profit unless NPV or or IRR which needs to be discounted.
- It accounts the entire accounting profit throughout the projects life
IRR
- considers time value of money
- Non financial manager understand it
- Congruent with wealth maximization of shareholder (since it takes account of opportunity cost)
- entire project cash flow is considered
Pay back-
- Very simple and ez to calculate
- Cost effective (less hassle is required)
- Risk is considered (Since its tells the investor when they will be 'paid back')
- Liquidity may be improved if used, if company sets shorter payback level )
Discounted Pay back :
-same as above , but takes account of time value of money
NPV (Net present Value)
- Most scientific and logical appraisal technique
- Time value is considered
- Congruent with Shareholders wealth maximizations objective
- cash flow of entire project is taken into account
- Risk of specific project can be adjusted by increasing cost of capital (if the project is risky, or lowering the cost of capital if it is less risky)
Only Advantages are mentioned. There are limitation and disadvantages of each of the techniques.