A Note On The Financial Evaluation Of Projects

NET PRESENT VALUE Contd..

The evaluation criteria used by the NPV method are:

•The project is accepted when the NPV is positive.
•The project is rejected when the NPV is negative.
•The project reaches the point of indifference when the NPV is zero.

For more than one mutually exclusive project, the one with the highest NPV must be selected.

The Benefit Cost Ratio (BCR) is a time-adjusted capital budgeting technique. Also known as the profitability index, it measures the present value of returns per rupee invested. BCR is defined as the ratio of the present value of benefits to the initial investment. It is represented as follows:

Where, BCR = Benefit-cost ratio PVB = Present value of benefits I = Initial investment The decision rule associated with BCR criteria is to accept all proposals with a BCR greater than one. If the BCR is equal to one, the firm is indifferent to the project. If two or more projects are mutually exclusive, then the project with the higher BCR should be chosen.

There is another measure - Net Benefit Cost Ratio (NBCR) linked to BCR. It is the ratio between NPV and initial investment

Three decision rules associated with NBCR criterion are
• If NBCR is greater than zero, the project is accepted.
• If the NBCR is equal to zero, the firm is indifferent to the project.
• If the NBCR is less than zero, the project is rejected.

Consider the two mutually exclusive projects X and Y with the following cash flow streams. The cost of capital for both the projects is 14%.

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APPRAISAL TECHNIQUES IN PRACTICE FOR VARIOUS TYPES OF PROJECTS

CONCLUSION

EXHIBIT I ASPECTS OF PROJECT APPRAISAL

EXHIBIT II PROJECT EVALUATION TECHNIQUES

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