A Note On The Financial Evaluation Of Projects

NET PRESENT VALUE Contd..

 

The BCR of both the projects is calculated as follows: Project X = Present Value / Initial Investment = 163641/155000 = 1.05575 Project Y = Present Value / Initial Investment = 56590.4/48000 = 1.17896 Though the BCR of both the projects is more than 1, Project Y should be accepted as it has a higher BCR than Project X.

Merits of BCR Criterion

BCR, like NPV criterion, also considers the time value of money when evaluating projects. It also takes into account all the benefits accruing over the life of the project. It is superior to the NPV measure in the sense that it evaluates the project in relative terms rather than absolute terms.

Demerits of BCR Criterion

This criterion may assign a similar ranking to two different projects.

The evaluation criteria used by the BCR method are:

• The project is accepted when the BCR is greater than one.
• The project is rejected when the BCR is less than one.
• The project reaches the point of indifference when the BCR is equal to one.

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

INTERNAL RATE OF RETURN METHOD

The second time-adjusted criterion for the appraisal of a project is the internal rate of return. This refers to the rate of return that is earned by a project. It equals the present value of cash inflows with the present value of cash outflows i.e. it is the discount rate at which the NPV of the project is zero.

If the IRR of a project is greater than the cost of capital, the project should be accepted. In this case, the cost of capital is also called the hurdle rate. The IRR is represented by the following formula:

Where CFt = Cash inflows at different time periods
r = internal rate of return
n = Life of the project

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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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