Investment Appraisal Techniques Essay Example | Topics and Well Written Essays - 1250 words

Investment Appraisal Techniques - Essay ExampleSome of the enthronization idea techniques used range from acquit Present Value (NPV), Accounting regularise of Return (ARR), inherent Rate of Return (ARR) and Payback Period. Net Present Value (NPV) As one of the investment appraisal techniques, net subject value (NPV) method ensures that the value of all the expected future exchange flows is delibe straddle into the present values (Droms, & Wright, 2010). More significantly, the net present value (NPV) method takes into consideration the difference that arises amidst the present value of the expected cash in inflows of a project and the present value of the expected cash outflows that the project will give up in the future (Crosson & Needles, 2011). This is essential in the determination of whether or non the project is viable in the present condition if the projected will yield the projected cash flow in the future (Moyer, McGuigan & Kretlow, 2008). Calculations are done u sing the discount rate of the cost of hood that is determined depending on considerations of the future projected risk of the project (Hastings, 2009). More so, the use of the net present value (NPV) method in capital budgeting is necessary because it analyzes the profitability level of the intended project (Mowen, Hansen & Heitger, 2012). preceding(prenominal) all, use of net present value (NPV) method in capital budgeting analysis is critical because it is more(prenominal) sensitive as compared to other method because it relies on the future cash inflows that the project is expected to yield (Duenas, 2006). Net Present Value (NPV) method YEAR 0 1 2 3 4 TOTAL Initial Outlay (0) (300,000) (300,000) Sales revenue - - 350,000 390,000 410,000 1,150,000 Materials and components - (50,000) (65,000) (65,000) (50,000) (230,000) Salaries and Wages - (70,000) (80,000) (85,000) (85,000) (320,000) Depreciation - (45,000) (45,000) (45,000) (45,000) (180,000) Advertising - (25,000) (25,000) ( 25,000) (25,000) (100,000) Equipment disposal 120,000 120,000 Net cash flow (0) (490,000) 145,000 170,000 325,000 150,000 Discounted factor (15%) 1.0 0.8696 0.7561 0.6575 0.5718 Discounted cash flows (0) (426104) 109,634.50 111,775 185,835 (18,859.5) Overheads are not taken into account as expenses because it is not directly related with the project. More so, the overheads costs are related with the companies head office function. Accounting Rate of Return (ARR) Another investment appraisal technique that is used to estimate the expected rate of reaping of anticipated investment project is the accounting rate of return (ARR). More significantly, the use of the accounting rate of return (ARR) gives a more rapid way of estimating the expected net clams as a basis for comparing several different expected projects to be undertaken by a company (Siegel, Shim, & Hartman, 1998). In addition, the accounting rate of return (ARR), takes an estimate of the returns that the expected project w ill yield during its entire usable life. As compared to the payback period method, the accounting rate of return (ARR) is rational as it considers the distribution of profits and not only the period the project is expected to take to get back the original quantity of investment in the project (Brigham & Houston, 2009). One weakness of the accounting