Investment Appraisal Methods

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LITERATURE REVIEW OF INVESTMENT APPRAISAL METHODS What is meant by investment appraisal practices? The investment appraisal process includes the generation of ideas, assessment and authorization, implementation and control of the project (Dennis R. Young, 2007). Decision-making is increasingly more complex today because of uncertainty. Additionally, most capital projects involve numerous variables and possible outcomes. For instance, estimating cash flows associated with a project involves working capital requirements, project risk, tax considerations, expected rates of inflation, and disposal values. It is necessary to understand existing markets to forecast project revenues, assess competitive impacts of the project, and determine the…show more content…
The further into the future a consumer has to wait, the greater the interest compensation required. So if one knows of a certain future receipt of cash then there must be a certain value today, which is called the present value, which will be its equivalent. By receiving today an amount of cash equal to the present value, the recipient would be indifferent between the future receipt and today’s receipt. The difference between the two receipts is the time value, the compensation for the passage of time. The present value of a future amount is also known as the discounted value. Future value and compounding Whenever an investment is made, there is an expectation to earn a return which can take the form of interest when the investment is in some form of monetary asset. If the interest earned is reinvested rather than withdrawn then the total amount invested grows at a compound rate. At the end of the life of the investment (at maturity) it will have a value F – the future or maturity value. If P is the amount invested today at r% with compound interest for t years then the future value will be F. F = P (1 + r) t Present value and discounting The converse of compounding is discounting. This uses as its basis the sane algebraic relationship but in the opposite way. The aim of discounting is to determine the present value of a future amount (i.e. today’s amount) which, if invested at the rate of interest r, would achieve the
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