Topics: Net present value, Rate of return, Discounted cash flow Pages: 8 (1933 words) Published: February 19, 2013
Financial Viability of Investment Using Evaluation criteria -------------------------------------------------
Prepared by Sonia Afroze Khan, APMS 102







Registration No.–APMS102 -------------------------------------------------
DATE: 18 February 2013 -------------------------------------------------


Three factors must be considered before accepting any project If the project is Technically Feasible, Commercially Viable, Financially viable. For evaluation of Financial Viability, we need to employ any of the following methods:

1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Profitability Index (PI)

Investment decisions are generally called capital budgeting decisions. One of the main important concepts in analyzing investment is the concept of time value of. The value of a present amount in the past, present and future, founded by applying compound interest over time which is also known as future value. The future value of an investment may be increased by 1) earning a higher interest rate; and/or

2) by investing within an company stock, banks, and etc., for a longer period of time. Interest is a way of gaining more money. To be a little more specifically, it cost anyone and everyone to borrower and earning to the lender above and beyond the initial sum borrowed or loaned. One of the cornerstones of finance is the concept of the time value of money.   More concisely, a dollar received today is worth more than a dollar received some time in the future.   For example, if we are confronted with the situation where we are offered one dollar today or one dollar one year from now, we would choose the option, which provides us with the most wealth.   In the absence of interest, the decision of which option to choose would be irrelevant since one dollar received today would be equal to one dollar received one year from today.   However, with the existence of interest, money has a 'time value' and the economic value of the two transactions cannot be compared. Interest is the monetary compensation that is paid to lenders from borrowers for the temporary use of money.   Thus, one dollar received today will be deposited now and will receive interest for one year. As a result, with the existence of interest, the value of one dollar now will always be worth more than one dollar received some time in the future.  

A simple rule to understand with the time value of money is that if events do not occur at the same point time, we cannot compare the values.

Managers all over the world are constantly faced with various investment opportunities; they are under the pressure to make investment decisions that will best maximize shareholders wealth.   Therefore, Capital budgeting is useful in helping managers identify investment opportunities where benefit exceeds cost. Some of these budgeting techniques include Net Present Value(NPV), Internal Rate of Return(IRR), Payback Period, Average Accounting Return(AAR)   and Profitability Index. In this work however, I will be more concerned with the NPV:   I will attempt to...
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