Question

5c. Explain at least five (5) investment appraisal tools highlighting their reject/accept criteria

as well as their pros and cons. Again, demonstrate your understanding of these appraisal

tools by applying at least three of them to a two project scenario.

Answer 1

5 investment appraisal tools are as follows-

A. Net present value- It is calculated after ascertainment of future value of cash flows at the present and adjusting it with outflows.if the net present value is positive, it will mean the project should be accepted, if the net present value is negative, it will be in the project should be rejected.

B. Profitability index-it is calculated after dividing the present value of cash inflows and the present value of the cash outflows and if the profitability index is the greater than 1 , then project should be accepted.

C. Accounting rate of return-this is the rate of return which is generated by the project and if the project is able to generate a positive rate of return, it is to be accepted

D. Internal rate of return-it is a rate of return which will equalise present value of cash inflows with the present value of the cash outflows and if the IRR is greater than WACC, Project is to be accepted and vice versa.

E. Payback period-payback period is the period in which the initial investment are realised and when the payback periods are quick in nature, then the projects toto be accepted.

The problems relating to these investment appraisal projects tools are are these are not able to ascertain the rate of discounting correctly and the cash flows are also not measured correctly as they are related to the future.

internal rate of return and net present value along with payback period are mostly used in order to various capital decision acceptance and refusal because capital budgeting decisions is related to investment of a large chunk of money for a longer period of time and these investment appraisal tools are highly used in order to accept or reject the project undertaken