INVESTMENT APPRAISAL

Investment Appraisal

Task 01: A description of each of following investment appraisal methods, using your own word (not direct quotes): payback period, accounting rate of return, net present value, and internal rate of return.

Answer:

Net present value

Net Present Value (NPV) is the most popular method when evaluating investment projects in the long term. The net present value to determine whether an investment complies with the basic objective financial: maximize investment. This change in the estimated value can be positive, negative or remain the same. If it is positive, it means that the value of the firm will increase equivalent to the amount of Net Present Value. If it is negative, then it means that the firm will reduce their wealth in the value yielding the VPN. If the result is zero NPV, the firm does not change the amount of its value. It is important to note that the value of the net present value depends on the following variables: The initial investment prior investments during the operation, the net cash flows, the discount rate and the number of periods throughout the project (Bruce, 2003, 105-119).

Net Present Value is a measure of benefit that pays a draft investment throughout its useful life is defined as the Present Value of Flow of Income Future minus Present Value of Flow of Costs. It is an amount of money equal to the sum of the flows of revenues generated by the project net in the future. The discount rate or discount used to calculate the net present value should be the rate of cost alternative capital to be invested. However, due to the practical difficulties of calculating the fee generally uses the rate of interest of market. The method of net present value decision criterion provides a precise and simple: You should perform only those projects of investment to upgrade to the discount rate relevant to have a net present value equal to or greater than zero.

Internal rate of return

The internal rate of return or internal rate of return (IRR) of an investment is defined as the rate at which the net present value or net present value (NPV) is zero. The NPV or NPV is calculated from the cash flow per year, transferring all future amounts to the present. It is an indicator of the profitability of a project, the higher IRR, profitability. It is used to decide on acceptance or rejection of an investment project. To this end, the IRR is compared with a minimum rate or shear rate, the opportunity cost of investment (if investment is not at risk, the opportunity cost used to compare the IRR is the rate of risk-free return). If the rate of return of the project - expressed by the IRR exceeds the rate-cutting investment is accepted, otherwise is rejected (Bichler and Nitzan, 2010, 8-11). The benefits of the Internal Rate of Return (IRR) are as follows: Focuses on net cash flows of the project to be considered the internal rate of return as an ...