Capital Investment Decisions: the Case of Diamond Plc

3285 Words14 Pages
Capital Investment Decisions: The case of Diamond PLC

CONTENT PAGE
PAGES
1.1 - Introduction...................................................................................................4

1.2 - Literature review............................................................................................4-6

2.1 - Advantages and disadvantages of Net Present Value....................................6-7

2.2 - Advantages and disadvantages of Internal Rate of Return............................7-8

2.3 - General formulas............................................................................................9-14

3.1 - Critical
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Financial literature indicates NPV is best for capital rationing, and 7/15 of firms indicated that IRR was their primary choice in case of rationing. This survey specifies that the IRR technique is most popular for the evaluation of mutually exclusive projects, even though most financial literature considers it to be inaccurate when compared to NPV.

The third article “Capital Budgeting Practices: A Survey in the Firms in Cyprus” investigates: 1. the methods used by the Cyprus companies to evaluate investments, and 2. the approach adopted to handle important estimation problems inherent to the use of these methods. It was found that 54.43% of projects evaluation is done by means of a simplified evaluation technique and that 36.71% of the companies use the payback period technique. Among the methods that take into account the time value of money concept, the NPV method is the one most companies prefer, and only 8.86% of them use IRR.
In this study Hatfield, Horvath, and Webster (1998) investigated the importance of payback, average rate of return, IRR, and NPV capital budgeting techniques for the performance and value measures of firms. They found that firms analyzing all projects have higher share prices on average. They also found, in contrast to the theory of finance, that the NPV technique is not maximizing the value of the firm. Their results indicated that it is best not to rely on any single capital

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