Financial Appraisal Methods
In this assignment I will be identifying the main capital appraisal techniques and evaluate them by showing their strength and weaknesses. Then compare them with each other and show the main difference between them. At the end I will be showing some tables taken from different books ranking these methods and showing which methods are more used by most of the companies in the US and UK.
Most of the competitive companies are looking for expansion and growth in order to control a bigger share of the market and eventually make more profits for the share holders and the stock owners, to do that the companies should always: * Identify potential investments * Review, analyze, and select from the proposals that have been generated * Implement and monitor the proposals that have been selected
And since they commit a substantial proportion of a firm’s resources to actions that are likely to be irreversible; the managers aim to maximize shareholder`s wealth by maximizing long-term returns, taking account of risk and liquidity. Capital investment decisions normally represent the most important decisions that the managers make to choose the best investments to take using the capital appraisal methods.
Some of the capital appraisal methods ignore the time value of money like payback and Accounting Rate of Return (ARR) as they depend on the cash flow and the profit made by this investment, the other methods take into consideration the time value of money using a technique called Discounted Cash Flow like Net Present Value (NPV) and Internal Rate of Return (IRR).
The payback method is one of the simplest and most frequently used methods of capital investment appraisal. It is defined as the period in months or years that is required for a stream of cash earnings from an investment to recover the original cash outlay required by the investment but without taking in consideration the time value of money. Similarly to the payback method the Accounting Rate of
Most of the competitive companies are looking for expansion and growth in order to control a bigger share of the market and eventually make more profits for the share holders and the stock owners, to do that the companies should always: * Identify potential investments * Review, analyze, and select from the proposals that have been generated * Implement and monitor the proposals that have been selected
And since they commit a substantial proportion of a firm’s resources to actions that are likely to be irreversible; the managers aim to maximize shareholder`s wealth by maximizing long-term returns, taking account of risk and liquidity. Capital investment decisions normally represent the most important decisions that the managers make to choose the best investments to take using the capital appraisal methods.
Some of the capital appraisal methods ignore the time value of money like payback and Accounting Rate of Return (ARR) as they depend on the cash flow and the profit made by this investment, the other methods take into consideration the time value of money using a technique called Discounted Cash Flow like Net Present Value (NPV) and Internal Rate of Return (IRR).
The payback method is one of the simplest and most frequently used methods of capital investment appraisal. It is defined as the period in months or years that is required for a stream of cash earnings from an investment to recover the original cash outlay required by the investment but without taking in consideration the time value of money. Similarly to the payback method the Accounting Rate of