FINANCIAL MARKETS

Financial Markets



Investment appraisal

The process of decision-making in any institution depends on the existence of more than one alternative available to the administration and management to choose a suitable alternative that can achieve a higher return and less expensive, and comes through a process of evaluating alternatives available, a work that is considered the heart of the work of management accounting. The assessments of alternatives in the current budget on profitability in the short term, but in the capital budget, projects do not achieve a quick profit in the short term. Therefore, assessment is based on the use of several methods and different models choose from the method that fits with the nature of the project and its possibilities(Pablo, 2004). These include methods and models: 1 -       Discounted cash flow models - Net present value method. - Style index of profitability. - Method of internal rate of return. 2 -       Payback Period - Method recovery period. - Discount rate of recovery. - Reverse recovery method. 3 -       Methods and models accounting - Method of annual cost equation. - Mal yield method of accounting (the average return on investment). - Additional analysis method and style of the overall analysis. Differential analysis

Differential analysis will be exposed in this paper to these methods in terms of how to calculate the advantages and disadvantages of each method(Ruback, 2000) (Kubr, 2001) (Kubr, 2001).

Advantages and disadvantages of the payback method of appraisal

Payback Period

Method of recovery period

Is one of the methods commonly used in the evaluation of investments, and measuring the length of time required to recover the original investment expenditure. The aim of this method is essential to achieve the liquidity risk and should be kept to a minimum by trying to Redemption rapid original costs of the investment without regard to profitability. To determine the recovery period is required to identify the value of the original investment and then estimate the annual cash flows, inflows from operating after deducting operating costs, where:

Payback period = original cost of investment / annual cash flows of Operating The disadvantage of this method is that the project is to recover at least not necessarily be better than that period to recover more where that method payback period is just a measure of risk. Example: If there is a machine cost 12,000 Pounds, and check the annual flow of 4000 Pounds, and other machine cost JD 10000 and achieve the same annual flow. Required: Using the method adopted the EEC import whichever machine you choose the first or the second? Solution (Pablo, 2004) (Pablo, 2004).

Payback period of the machine first = 12000/4000 = 3 years The payback period for the second machine = 10000/4000 = 2.5 years The second machine will be accepted as the period of recovery is less.

Discount rate recovery: In this method combines the present value of annual cash flows, and compared with the value of the original investment, and this method overcomes some weaknesses in the previous method, it ...