A Note On The Financial Evaluation Of Projects

NET PRESENT VALUE Contd..

The merit of this criterion is that it is easy to calculate and understand. However, the demerit of this method is that it uses accounting profits instead of cash flows. The evaluation criteria using this method are: •The project is accepted when the actual ARR is greater than the required ARR. •The project is rejected when the actual ARR is less than the required ARR. •When there are mutually exclusive projects, the one with the highest ARR but more than the cut off ARR must be selected

PAYBACK PERIOD METHOD:

This is the most commonly and widely used method for the appraisal of capital investment decisions regarding projects. This criterion evaluates a project on the basis of the speed with which it recovers its initial investment. It can be computed in two ways: When the cash inflows after tax (CFAT) are the same every year the following formula is used:

Payback period = Initial investment /CFAT

Example:

Consider two mutually exclusive projects X and Y. Project X is expected to earn a CFAT of Rs 9800 every year for 6 years. Its initial investment is Rs 35000. Project Y is expected to generate a CFAT of Rs 11200 every year for 6 years. Project Y's initial investment is Rs 35000. Calculate the PB period for both the projects.

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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