Investment Appraisal

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SCHOOL OF BUSSINESS AND LAW
LONDON

NAME: Mr. ASHISH KUMR NAFRI

STUDENT ID: 0022KONS1109

SUBJECT: ACCOUNTING AND DECISION
MAKING TECHNIQUES (ADMT)

LECTURER: MR. S. A. PALAN

CONTENTS

Introduction…………………………………………………………………….………2

Define Capital Investment Appraisal…………………………….………………….…2

Discounted cash flow methods……….………………………….………………….…4

Explanation of NPV…………………… ...................................................................…4

Explanation of IRR…………….……………………….…….……..…………………5

Advantages and disadvantages...……..……………………………………….……….5

Project calculations........................................................................................................6

Reason to choose project..............................................................................................11

Reference &Bibliography............................................................................................12

Introduction:-

It is very important for every business to be made right investment. It is very clear to all of us that capital investment concept plays an important role in the smooth running of an organization, in order to raise maximum income. Here we cannot say that every investment helps to maximize the profit of a business. So business managers have to find which investment should to be made for the business, then they do so by applying the different methods of capital investments appraisal technique. Investment appraisal helps the managers when they plan for the long term strategy for the organization. In this strategy they take decision on amount which they need to invest in fixed assets and also in working capital, in order to increase and maintain the productive efficiency of an organization.

Normally business managers have many choices to take in the shape of different projects or also each project requires different type of investment.

Define capital investment appraisal:-

“Capital investment appraisal is a technique where by long-term capital projects may be considered to determine whether such projects are financially viable and worth undertaking or to determine the relative financial viability where there is a choice between alternative competing projects.” (Cost Accounting-an essential guide)

Investment appraisal technique is a bundle of methods which check the worthiness of projects and also for both public and private sectors. These methods enables the managers to account the ranks among all different projects available for the business and also enables managers to understand the economic life of a project when it has come to an end. The ethical methods of capital investment appraisal are as follows:-

• Pay back method

• Annual rate of return method

• Internal rate of return method

• Net present value method

First two methods pay back and ARR of capital investment appraisal are comes under conventional methods and last two (IRR and NPV) methods are comes under discounted cash flow methods. Both methods include the one very important concept ‘time value of money’

Discounted cash flow methods:-

These are two main methods which come under the investment appraisal techniques, they both are more likely because the both method does take into account the time value of money. These two methods definitions and explanations are s follows:-

• Net Present Value (NPV)

• Internal rate of return (IRR)

EXPLANATION OF NPV:-

1: NET PRESENT VALUE (NPV): - “In investment appraisal methods the procedure of NPV works on quite simple principals who are fundamentally strong that an investment is worthwhile undertaking. If the money got out of the investment is at least equal to – if not greater than-the money put in.” (Stephen lumby, 1998)

The NPV method works on very commonsense principals. We can better understand this method by...
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