Question

Chapter 9 discusses the criteria/methods used to evaluate the proposed investments. In 500 words or more, discuss the following:

1. The best criterion to evaluate a project, and why?
2. List other methods used to evaluate project worthiness and how the best criterion is better than each one of them

Answer 1

Evaluation of the proposed investments involves a detailed assessment of various aspects taking into account planning, implementation and monitoring. It helps in the sound decision making. Evaluations can either be from project goals aspect i.e.; evaluation of action in relation to the objectives or it can be operational aspects.

Evaluation of investment projects can be divided into static methods and dynamic methods.

Static methods:

• It assesses the effectiveness of projects by relating the annual proceeds and the total expenditure for the implementation of the project.
• They do not consider the time factor in their calculation. This is a major problem with this method since it doesn't consider the payments distributed over time.
• This method can be used when there is very less information available about the project. When it is a small project where inputs and effects d not have much impact.
• There are various other static methods to evaluate a project:
  • Payback period
  • Average rate of return on investment

Dynamic Methods:

• Dynamic methods consider the time factor and a more proper way to assess/evaluate a project.
• There are numerous ways to evaluate this, most widely used ones are listed below:
  • NPV - Net present value
  • IRR - Internal rate of return
  • MIRR - Modified internal rate of return
  • Annuity method