Difference Between Financial Analysis And Economic Analysis

Various documents such as a project scope statement, one-time cost or recurring cost worksheet can be created to list costs associated with the project. Other methods include the time value of money, which refers to comparing present cash outlays to future expended returns, and a break-even analysis in order to determine economic feasibility.

The payback period looks at a project only until the costs have been recovered. This analysis tool is often ignored because it does not take into consideration the time value of money. The time value of money limitation of the payback period can be modified by using the discounted cash flows of a project for the analysis of when the outflows will be recovered.

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

a) Discounted cash flows from the projects by the suitable division of a hurdle rate to get the net present value which financially makes sense since risks among different divisions do vary.

Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.

The primary purpose of the scorecard is to help measure the financial perspective of the project. This will help measure reflecting financial performance, for example number of debtors, cash flow or return on investment, Net Present Value (NPV) and Internal Rate of Return (IRR). Several different procedures are available to analyze potential business investments. First, the most important concept of evaluating these investments is the NPV. NPV of a project can be viewed as the difference between an investment 's market value and the cost of that investment. It is only a good investment if it makes money for the company, so a positive NPV will be needed. The projects can be ranked

1. Discount rate: The analysis assumes that the discount rate is the same for the complete throughput time of the project. This can be countered by using different discount rates for different years, in case required.

Account for time. Time is money. We prefer to receive cash sooner rather than later. Use net present value as a technique to summarize the quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

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.

In fully investigating all of our calculations we are fully invested in using the Net Present Value figures we calculated as a means of ranking the eight projects. In doing so we found reasons in which why the Net Present Value was our benchmark for ranking the projects and why we did not use the Payback Method. The Payback Method ignores the time value of money, requires and arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development and new projects. When comparing the Average Accounting Return Method to the Net Present Value method we found that the Average Accounting Return Method is a worse option than using the Payback Method. The Average Accounting Return Method is not a true rate of return and the time value of money is ignored, it uses an arbitrary benchmark cutoff rate, and is based on accounting net income and book values, not cash flows and market values. Plain and simply put, the Net Present Value method is the best criterion to use when ranking these eight

There are several traditional methods that can be used in appraising investment decisions. For instance, the net present value method (NPV) which entails estimating the costs and revenues of a project and discounting these figures to get their present values. Projects with the biggest positive net present value are the ones chosen as they represent the best stream of benefits of investing in the project over and above recovering the cost of initiating the projects. The discount rate is another method which is similar to the net present value method but reflects more on the time preference. This approach may focus on the opportunity cost of

All of the 11 projects are primarily ranked based on quantitative measurements. We have to also take into consideration of other quantitative aspects like length of the project, initial investment and anticipated payback period. Moreover, this

This ratio is expressed in percentage. If the ratio is high it shows that the company is utilizing its assets in better way to generate its income. If the ratio is less it shows that the company is in difficult position to meet its debt. Formula to find the return on assets ratio is: - return on assets = net profit / total assets. Whereas net profit means the amount arriving after deducting all the expenses which includes taxes also. In addition to this he also explains about the profit margin ratio (PMR). PMR is the ratio which expresses the relationship between profit and sales. Formula used to find the PMR is: - Profit margin ratio = net profit/net

Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I