What do surveys tell us about the method of investment appraisal used by business ?

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Expert Solution

Investment appraisal is important because it helps to achieve the long term goals of shareholders wealth maximisation and achieve long term business goals.

The methods of Investment Appraisal used by business is :

Payback method
NPV method/ Discounted cash flow method.

Payback method : this method calculates the time period it will require for a project to recover it's initial investment. The payback period is the time it takes for net cash inflow to equal the cash investment. The longer the payback period, is bad for the project. If the payback period> , then the cut off pay back period, then the project is rejected.

NPV method: this is a discounted cash flow method. It compares the initial investment with the present value of the expected cash flows in the future. If the NPV> 0, the project is accepted, else it is rejected.

The survey finds that companies are using more methods together, that usage of the more sophisticated discounted cash flow techniques is higher, and that usage of the less theoretically sound accounting rate of return technique is lower.

jeff jeffy answered 10 months ago

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