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CH 29

This document discusses investment appraisal techniques used to evaluate capital investment projects. It defines investment appraisal as the set of techniques used to determine whether an investment project should be undertaken or to rank projects based on desirability. The key techniques discussed are payback period, average rate of return, net present value, and internal rate of return. Payback period measures the time to recover the initial investment, while average rate of return measures average annual profit as a percentage of initial cost.

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168 views

CH 29

This document discusses investment appraisal techniques used to evaluate capital investment projects. It defines investment appraisal as the set of techniques used to determine whether an investment project should be undertaken or to rank projects based on desirability. The key techniques discussed are payback period, average rate of return, net present value, and internal rate of return. Payback period measures the time to recover the initial investment, while average rate of return measures average annual profit as a percentage of initial cost.

Uploaded by

meelas123
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Investment Appraisal Ch 29

Investment
 According to economist “investment means the purchase of capital goods such as machinery,
buildings etc”.
 On stock exchange “Investment means buying shares”.
 Consumption of resources on capital for future return.
 Risk in Investment
Investment is always risky because long term decision making is involved in it. Decisions are taken on
the bases of forecasting which may be wrong or there may be any change in the market.
HIGH RISK HIGH RETURN **** LOW RISK LOW RETURN
Investment Appraisal
Investment appraisal is the set of techniques for determining whether a capital investment project should
be undertaken or not, or for ranking investment projects in order of desirability.
 Information Required for Techniques
Initial cost on investment
Expected life – of equipment or return on investment
Residual value
Forecasted net cash flow from the project
Formula:
Forecasted net cash flow = Forecasted cash inflow (annual revenues) - Forecasted cash outflow
(annual operating costs)
Investment Appraisal Techniques
1) Payback period
2) Average rate of return
3) Net present value
4) Internal rate of return

Payback Period (PBP)


Payback period refers to the amount of time it takes for a project to recover or pay back the initial outlay.
 Advantages
Useful when there is a rapid change in technology
This method is adopted to select projects when firms are in cash flow problems
 Disadvantages
Cash earned after payback period is not taken into account in the decision to invest
This method ignored the profitability of the project
It ignore the time value of money
Average Rate of Return (ARR)
The average rate of return measures the net return each year as a percentage of the initial cost of the
investment.
Formula
Average annual profit x 100
Initial capital cost

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