Investment Appraisal

2283 WordsJan 16, 201310 Pages
Accounting and Decision Making Techniques Assingment MFP/MBA April 2012 – July 2012 Semester By Pyae Thu Aung Student ID: B0340LSTH0412 Student Name: Pyae Thu Aung Student ID: B0340LSTH0412 Accounting and Decision Making Techniques Table of contents (a) Why is the investment appraisal process so important? ……….......................1 (b) What is the payback period of each project? If AP Ltd imposes a 3year maximum payback period which of these projects should be accepted? ………………………………………………….……..............1 (c) What are the criticisms of the payback period? ................................................2 (d) Determine the NPV for each of these projects? Should they be accepted? Explain why?…show more content…
(c) What are the criticisms of the payback period? There are a couple of drawbacks to using the payback period method. For one thing, it ignores any benefits that occur after the payback period, so a project that returns $1 million after a six- year payback period is ranked lower than a project that returns zero after a five-year payback. But probably the major criticism is that a straight payback method ignores the time value of money. To get around this problem, you should also consider the net present value of the project, as well as its internal rate of return. (www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_6510) As the payback method measures only cash flow within the period without caring profitability, it is sometimes risky that the shorter payback periods might be chosen although the project is not much profitable than other long-run projects. (d) Determine the NPV for each of these projects? Should they be accepted? Explain why? 1. Net Present Value (NPV) for project A @ 12%; Years 1 2 3 4 Net Cash flow (NCF) £000 20 30 40 50 Cost of Capital @ 12% 0.893 0.797 0.712 0.636 Present Value £000 17.86 23.91 28.48 31.8 2 Student Name: Pyae Thu Aung
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