preview

Essay On Forecasting

Decent Essays
Open Document

Investments in different areas of business are undertaken with the understanding that the proposed project that corresponds the investment decision must generate sufficient cash inflows. However, the difficulty arises on how the project should be evaluated in terms of different variables determining a good, profitable investment. Among the many different investment-forecasting models available, the most common approach that has been followed very often is the rate of return. Some alternatives are also used, for example, cut-off rate of return, sometimes called the hurdle rate – the minimum rate of return that the proposed investment outlay must generate. To select the best project among many alternatives, decision makers often take help …show more content…

It is true that there lie significant differences among investment projects because of differences in objectives and ways of materializing the projects. However, evaluation of investment projects must be based on some common principles. According to Vilnesky et al., (2004), these principles are categorized into three phases: ü Methodological principles – the most general principles of appraisal. Its application is based on the reasonable behavior of entities irrespective of objectives and types of projects. ü Methodical principles – these principles ensure the economic justification of the project’s evaluation. ü Operating principles – these principles facilitate and simplify the assessment procedures and guarantee an adequate accuracy. Considering the above principles, decisions should be made on which method to choose to evaluate a certain kind of project irrespective its nature and level of complexity. Once the models are developed and information based on those models are at hand, managers need to decide which project possess the best potential in terms of profitability, consistency in cash flow generation, sustainability and level of risk associated with it. For example, if net present value (NPV) is considered to be a forecasting model, project having larger NPV will be selected. Again, for internal rate of return (IRR), project ensuring higher return on similar amount of investment should be taken into

Get Access
Related
Get Access