Investment Appraisal Essay Example | Topics and Well Written Essays - 1500 words

Investment Appraisal - Essay ExampleInvestment AppraisalThe capital budgeting decisions ar pertaining to coronation decisions which will create assets which will in turn create products/ services which create the profits. Gener tout ensembley, current assets are not earning assets but they act as a buffer for the smooth operations of the business. still the semipermanent investment decisions includes the mission and visions of the company and hence is of strategic importance. There are various techniques available for the approximation of investment proposal of marriages. They include the traditional normals, discounted exchange flow methods. But recently there is a aptness to shift to value management models and modified versions of DCF models is reflected among companies. This essay explains the nature of each method of approximation and too explains the recent trends to use the value management models with examples.For considering this proposal the management can use the investment appraisal techniques which can be segregated into two groups, first group comprising of traditional methods such as vengeance extent method and average rate of return method and second group comprising of time familiarised methods/ discounted cash flow(DCF) methods such as can present value method, internal rate of return method, net terminal value method and profitability index method.The payback flowing method is the simplest of all methods and it answers the prefatory question, how many grades will it take for the cash benefits to pay the original cost of investment. Cash benefits on a lower floor this method represent CFAT ignoring interest payment. The payback period of the investment is compared with the payback period predetermined by the management beforehand. If the proposal has a payback period less than the predetermined payback, then the investment proposal is selected. The major advantage with this method is that it is very simple to understand and cal culate. But the serious drawback here is that it ignores all the cash inflows after the payback period and it does not differentiate between the projects based on the quantify and magnitude of cash flows.The next method is the Accounting rate of return (ARR) method. The ARR is calculated as (Average yearbook profits after taxes / Average investment) x 100. If the Average rate of return is higher than the predetermined negligible rate of return then the investment proposal is selected. The advantage of this method over the payback period method is that it takes into account entire cash flows over the life time of the project unlike the former. But the major drawback here is that it takes the accounting income for the analysis but not the cash flows. Like the payback period method also does not take into account the time value of bills. When the time value of money is not taken into consideration when evaluating investment proposals the chances of choosing the wrong proposals are more. From the information provided Hence, the Time adjusted methods/ discounted cash flow (DCF) methods are widely used for making decisions in corporations. The Net present value method is described as the summation of the present values of cash proceeds (CFAT) in each year minus the summation of the present values of the net cash outflows in each year. The decision rule for this method is that when NPV zero, accept the prpoposal and if NPV zero, reject the proposal. The first and foremost advantage of this