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    Project Appraisal Techniques

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    Avila Victoria
    This document discusses various project appraisal techniques used to evaluate capital investment projects. It describes traditional methods like payback period and average rate of return that do not consider time value of money. Discounted cash flow methods like net present value, internal rate of return, and profitability index are presented as more accurate techniques that account for the time value of money by discounting future cash flows. The document provides merits and demerits of each method to help select the most appropriate technique for a given project appraisal.

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    Project Appraisal Techniques

    Uploaded by

    Avila Victoria
    174 views24 pages
    This document discusses various project appraisal techniques used to evaluate capital investment projects. It describes traditional methods like payback period and average rate of return that do not consider time value of money. Discounted cash flow methods like net present value, internal rate of return, and profitability index are presented as more accurate techniques that account for the time value of money by discounting future cash flows. The document provides merits and demerits of each method to help select the most appropriate technique for a given project appraisal.

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    This document discusses various project appraisal techniques used to evaluate capital investment projects. It describes traditional methods like payback period and average rate of return that do not consider time value of money. Discounted cash flow methods like net present value, internal rate of return, and profitability index are presented as more accurate techniques that account for the time value of money by discounting future cash flows. The document provides merits and demerits of each method to help select the most appropriate technique for a given project appraisal.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    174 views24 pages

    Project Appraisal Techniques

    Uploaded by

    Avila Victoria
    This document discusses various project appraisal techniques used to evaluate capital investment projects. It describes traditional methods like payback period and average rate of return that do not consider time value of money. Discounted cash flow methods like net present value, internal rate of return, and profitability index are presented as more accurate techniques that account for the time value of money by discounting future cash flows. The document provides merits and demerits of each method to help select the most appropriate technique for a given project appraisal.

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    PROJECT

    APPRAISAL
    TECHNIQUES
    CONTENTS
     PROJECT APPRISAL - DEFINITION
     CAPITAL BUDGETING
     PROJECT APRISAL OR CAPITAL BUDGETING METHOD
     TRADITIONAL METHOD
     DISCOUNTED CASH FLOW
    PROJECT APPRISAL
     POJECT APPRISAL MEANS THE ASSESSMENT OF A
    PROJECT
     WHILE APPRAISING PROJECT,TECHNICAL,
    FINANCIAL, ECONOMIC, MANAGERIAL,
    COMERCIAL AND SOCIAL ASPECTS ARE TAKEN
    INTO CONSIDERATION
    CAPITAL BUDGETING
     CAPITAL BUDGETING IS THE PROCESS OF
    COMMITTING THE RESOURCES OF THE FIRM IN
    VARIOUS LONG-TERM INVESTMENT PROJECT IN
    RETURN OF EXPECTED STREAM OF RETUEN
    TRADITIONAL METHOD
     THE TRADITIONAL METHODS ARE THOSE
    WHICH IGNORE TIME VALUE OF MONEY .
     THE CASH INFLOW ARE TAKEN AS SUCH IT
    ASSUMED THAT CASH INFLOW ARE
    REALISED AT TH END OF THE YEAR
     THEY INCLUDE

    . PAY-BACK METHOD
    . AVERAGE RATE OF RETURN(ARR)
    PAY-BACK PEROID
     ALSO KNOWN AS PAY-OUT OR PAY-OFF METHOD
     REFERS TO THE NUMBER OF YEARS REQUIRED TO GET
    BACK THE ORIGINAL INVESTMENT IN A PROJECT

    PAY-BACK PERIOD=COST OF THE PROJECT/ANNUAL CASH


    FLOWBEFORE DEPRECIATIONAND AFTER
    TAX
    MERIT DEMERIT
     SIMPLE AND EASY TO  DELICATE AND RIGID
    UNDER STAND  NOT CONSIDER EARNING
     GIVE IMPORTANCE TO BEYOND PAY-BACK
    SPEEDY RECOVERY OF PERIOD
    INVESTMENT  DOES NOT MEASURE THE
     IMPORTANT FOR CASH RATE OF RETUEN
    FORCASTING,BUDGETING,
    AND CASH FLOW ANALYSIS
     HELPFUL TO ANALYSIE
    PROJECT WITH HIGH
    UNCERTAINITY AND
    INSTABILITY
    AVERAGE RATE OF RETURN
    (ARR)
     ALSO KNOWN AS “ACCOUNTING RATE OF
    RETURN METHOD” .
     CONSIDERD TO BE AN IMPROVEMENT OVER
    THE PAY-BACK PERIOD METHOD
     IT IS CONSERNED WITH THE EARNINGS OF
    THE PROJECT DURING ITS ENTIRE
    ECONOMIC LIFE
     ARR=AVERAGE EARNING/AVERAGE

    INVESTMENT*100
    MERIT DEMERIT
     EASY TO UNDERSTAND  DOES NOT TAKE INTO
    ACCOUNT THE TIME VLUE
     PROJECTS OF DIFFERENT
    OF MONEY
    CHARACTERS CAN BE  IT DOES NOT CONSIDER THE
    EASILY COMPARED
    CASH FLOW WHICH ARE
    MORE IMPORTANT THAN THE
    ACCOUNTING PROFITS
     METHOD DOES NOTSUGGEST
    A RESONABLERATE OF
    RETURNON INVESTMENTS
    DISCOUNTED CASH FLOW (DCF)
     CONSIDER THE CONCEPT OF TIME VALUE
    OF MONEY FOR EVALUATING THE
    PROFITABILITY OF INVESTMENT
    OPPORTUNITIES
     CONCEPT OF TIME VALUE OF MONEY
    ASSUMES THAT MONEY EARNED IN AN
    EARLIER PERIOD IS MORE VALUABLE
    THAN THE SAME AMOUNT OF MONEY
    EARNED IN AN LATER PERIOD
    DISCOUNTED CASH FLOW
     DISCOUNT CASH FLOW METHODS ARE OF
    4 TYPES
    a. NET PRESENT VALUE METHOD (NPV)
    b. PROFITABILITY INDEX (PI)
    c. INTERNAL RATE OF INTREST (IRR)
    d. DISCOUNTED PAY-BACK
    NET PRESENT VALUE(NPV)
     CONSIDERED THE BEST METHOD TO
    EVALUATE PROJECTS
     IT IS THE DIFFERENCE BETWEEN THE
    PRESENT VALUE OF CASH INFLOW OVER
    THE PERIOD OF TIME
     IF NPV IS POSITIVE THEN ONLY THE
    PROJECT CAN BE APPROVED
     NPV=TOTAL PRESENT VALUE OF CASH IN

    FLOW- COST OF PROJECT


    MERIT DE MERIT
     MORE SCIENTIFIC AND  DIFFICULT TO USE
    DEPENDABLE  MAY NOT GIVE
     ALSO RRECOGNISEE THE SATISFACTORY ANSWER
    TIME VALUE OF MONEY  NOT EASY TO SELECT AN
     USEFULL TO APPLIED IN APPROPRIATE DISCOUNT
    CASE OF BOTH UNIFORM AND RATE
    UN EVEN CASH INFLOWS AT
    DIFFERENT PERIOD OF TIME
    PROFITABILITY INDEX METHOD
    (PIM)
     ALSO KNOWN AS BENEFIT COST RATIO METHOD
     IT IS REFINEMENT OF THE NET PRESENT VALUE
    METHOD
     INSTEAD OF FINDING NPV ,PRESENT VALUE
    INDEX IS FOUND OUT BY COMPARISING THE
    TOTAL PRESENT VALUE OF FUTURE CASH
    INFLOW AND THE TOTAL PRESENT VALUE OF
    FUTURE CASH OUTFLOW
     PRESENT VALU INDEX=PV OF CASHINFLOW/PV

    OF CASH OUTFLOWS*100
    MERIT DEMERIT
     IS VERY SCIENTIFIC AND  METHOD IS NOT
    LOGICAL ACCORDANCE WITH
     CONSIDERS FAIR RATE OF ACCOUNTING
    RETURN PRINCIPLESAND
     BASED ON RAL CONCEPTS
     COMPARIATIVELY
    PROFITABILITY OF
    PROJECT DIFFICULT TO
    UNDERSTAND ANB
     USE FULL COMPARING
    FOLLOW
    PROJECTS WITH
     DIFFICULT TO ESTIMATE
    DIFFERENT INVESTMENT
    THR EFFECTIVE LIFE OF
    PROJECT
    INTERNAL RATE OF
    RETURN(IRR)
     USED WHEN DISCOUNT RATE IS NOT
    KNOWN,BUT CASH OUTFLOW AND CASH IN
    FLOW ARE KNOWN
     THE IRR IS DEFINED AS THE INTREST RATE
    THAT EQUATES THE PRESENT VALUE OF
    EXPECTED FUTURE CASH INFLOW TO THE
    COST OF THE INVESTMENT OUTLAY
     IRR=

    CASHINFLOW/CASHOUTFLOW=1
    MERIT DE MERIT
     LIKE NPV IT RECOGNISE  DIFFICULT TO USE
    THE TIME VALUE OF BECAUSE IT INVOLVES
    MONEY COMPLICATED
     CONSISTENT WITH THE COMPUTATION PROBLEM
    FIRMS OBJECTIVE OF  MAY YEILD MULTIPLE
    MAXIMISING OWNERS RATES WHEN CASH
    WELFARE OUTFLOWS TAKE PLACE
     DISCOUNT RATE IS NOT AT DIFFERENT PERIOD OF
    REQUIRED TIME
    THANK YOU

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