A Note On The Financial Evaluation Of Projects

DISCOUNTED CASH FLOW/TIME ADJUSTED TECHNIQUES

This method requires cash flows to be discounted at a certain rate known as the cost of capital. This technique recognizes the fact that cash flows occurring at different time periods and in different amounts can be compared only when they are expressed in terms of a common denominator i.e. present value. Thus, in this method, all the cash inflows are discounted at an appropriate discount rate and the present value so determined is compared with the present value of cash outflows.

NET PRESENT VALUE Where, NPV = Net present value CFt = Cash flow at the end of year (t = 0……n) (cash inflow has a positive sign and cash outflow has a negative sign) n = Life of the project (number of years) k = Discount rate

The decision rule associated with NPV criteria is to accept all proposals with an NPV greater than zero. This indicates accepting all projects that add value after providing a return, consistent with the cost of capital and risk. Where two or more projects are mutually exclusive, then the project with the highest NPV should be chosen. The following example will make the concept clearer:

Example:

The cash flow stream of a construction project is estimated as follows:

The net present value of the above project at the cost of capital of 14% would be,

= -155000 + 33333.33 + 33856.57 + 33073.60 + 32268.38 + 31162.12

= 8694.00

Since the NPV of the project is greater than zero it can be accepted.

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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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