Capital Investment Appraisal Essay

By computing the highest discount rate at which a project will have a positive NPV, the IRR method is supposed to assure that the actual rate of return on an accepted project is higher than the required rate of return.

d. internal rate of return (IRR) the discount rate that forces a project’s NPV to equal zero. The project should be accepted if the IRR is greater than the cost of capital.

The City of Estiville uses Capital Improvement funds to purchase fire apparatus for the Estiville Fire Department. Due to the large increase of mid-rise hotels, the Estiville Mills Mall, and multiple apartment complexes being built, the city has determined the need for a Quint Combination Pumper on the south side of the main thoroughfare. ISO recently recommended the need for an engine in this area and this apparatus meets those needs due to its dual purpose of being used as an engine and an aerial device. The city will propose a bond during the October City of Estiville Council Meeting for a total of $1,000,000.00, which will include initial issue of equipment for the apparatus

The NPV calculation provides a dollar measure of how much a project is expected to add to a firm 's value. Analysts may also want to know what the rate of return on a project is in order to compare it to the cost of capital. This rate is called the internal rate of return, or IRR.

IRR is misleading because it ignores the absolute amount from the wealth of shareholders which may be increased when the project would be undertaken. It may also be

Target corporation uses projected profit as one its criteria to accept or reject the project, the entities sales had increased a lot from the previous years so the company project the project of the of new project by taking into account the existing stores profits.

In this assignment you will demonstrate your understanding of capital investment techniques by evaluating the following three case studies.

A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

The Investment Appraisal are techniques used in an organisation’s overall strategy and decision of capital investment. In general capital investment appraisal are used for ranking projects. A firm can usually have many projects that are appraised at the same time and those techniques will compare the projects and once completed will determine the highest one and this will be implemented. The investment appraisal considered are: ARR, PAYBACK, NPV AND IRR.

1. The cause to the conflict in the rankings is that while the IRR ranking shows a percentage so that you can see what percentage you are making on certain amount, it does not show the size of the project.

There are six projects which “Cheltenham Races” LTD aims to undertake and for this purpose the company is using investment appraisal methods. Investment appraisal procedure is the technique of evaluation of different projects to choose the best projects which maximise the company’s profit.

The IRR technique use the accept/reject criteria of comparing the IRR with the cost of capital which is based on comparing the internal rate of return to the cost of the capital of the project.

1. Large Amount of Company Resources: Involvement of large amount of company resources and efforts which will necessitate careful evaluation to be undertaken before a decision is reached.

The five investment appraisal techniques used for this report are the Accounting Rate of Return (ARR), payback period, Net Present Value (NPV), discounted payback and Internal Rate of Return (IRR). The results of the five investment appraisal techniques may not be similar because of differences in their approaches and calculations. However, it is advantageous to use more than one investment appraisal technique and understand the importance and problems of each method before making a final decision.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).