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Submitted by blaktiger on September 27, 2007
Category: Business
Words: 2385 | Pages: 10
Views: 423
Popularity Rank: 23,940
Average Member Grade: N/A (Add a Comment / Grade this Paper)
Introduction
Project appraisal techniques are a useful tool to assess the potential benefits and impacts of undertaking a project or a new development.
Three widely used and accepted methods used by finance and project managers are:
Payback Method
Accounting Rate of Return
Net Value & Net Present Value
This paper will exemplify and evaluate each of the three project appraisal techniques and highlight validity as an aid to decision making.
The following example will be used to illustrate each technique:
Initial Capital Cost £500,000
Lifespan 6 years
Cost of Capital 6 %
Residual Value 4 % of the initial capital cost
Additional Net Cash Flows:
Year 1 £50,000
£75,000
£100,000
£120,000
£90,000
£80,000
Discount Factors based on a 6% cost of capital:
Year 1 0.943
0.890
0.840
0.792
0.747
0.705
Payback Method
This is the simplest method of looking at one or more investments projects or ideas.
The payback method calculates the length of time it will take for the net cash flows to recover the initial capital costs. When comparing projects this technique holds that, all other things being equal, the better project is the one with the shorter payback.
A company may also compare the payback period of a project with the company's average or target when deciding whether to undertake a project.
This technique has been illustrated in Example 1.
Example 1
Initial capital £500,000
Year Net Cash Flow (£) Cumulative Net cash flow (£) Remainder (£)
1 50,000 50,000 450,000
2 75,000 125,000 375,000
3 100,000 225,000 275,000
4 120,000 345,000 155,000
5...
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