Project Appraisal Techniques Essay examples

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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…show more content…
The two methods lead to the same decision as long as consistent assumptions are used.
There are several weaknesses with these types of analysis. First, if inflation is expected then the replacement equipment will have a higher price. Also, the sales and operating costs will change meaning that the conditions built into the analysis would be invalid. Another difficulty that could be encountered is if the replacements that occur at a future date employ a different technology which would change the cash flows. This could be fixed in the replacement chain analysis, but not with the equivalent annual annuity approach. Lastly, it is very difficult to estimate the lives of projects so this may lead to speculations about the length of these projects. Consequently, due to all the uncertainties, managers for practical reasons will assume all projects to have the same life, but a problem will still exist if mutually exclusive projects have substantially different lives.
Mutually exclusive projects Mutually exclusive projects are another situation for which NPV must extend its approach. In such projects, the chosen project is usually one which results in the greatest positive NPV because this will produce the greatest addition to shareholders’ wealth. In the case of mutually exclusive investments, ranking becomes crucial as only
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