Illustrate the method of appraising capital investments, Financial Management

Q. Illustrate the method of appraising capital investments?

One of the potency of internal rate of return (IRR) as a method of appraising capital investments is that it is a discounted cash flow (DCF) method and so takes account of the time value of money. It as well considers cash flows over the whole of the project life and is sensitive to both the amount and the timing of cash flows. It is preferred by a few as it offers a relative measure of the value of a proposed investment that is the method calculates a percentage that can be compared with the company's cost of capital and with economic variables such as inflation rates and interest rates.

IRR has numerous weaknesses as a method of appraising capital investments. Ever since it is a relative measurement of investment worth it does not measure the absolute increase in company value (and therefore shareholder wealth) which can be found using the net present value (NPV) method. A further problem occurs when evaluating non-conventional projects (where cash flows change from positive to negative during the life of the project). IRR may propose as many IRR values as there are changes in the value of cash flows giving rise to evaluation difficulties. There is a potential disagreement between IRR and NPV in the evaluation of mutually exclusive projects where the two methods can offer conflicting advice as which of two projects is preferable. Where there is disagreement NPV always offers the correct investment advice: IRR doesn't although the advice offered can be amended by considering the IRR of the incremental project. There are consequently a number of reasons why IRR can be seen as an inferior investment appraisal method compared to its DCF alternative NPV.

Posted Date: 7/12/2013 5:23:03 AM | Location : United States

Related Discussions:- Illustrate the method of appraising capital investments, Assignment Help, Ask Question on Illustrate the method of appraising capital investments, Get Answer, Expert's Help, Illustrate the method of appraising capital investments Discussions

Write discussion on Illustrate the method of appraising capital investments
Your posts are moderated
Related Questions
Case Study - Credit-Linked Notes Credit linked notes are assets issued by financial institutions which have exposure to the credit risk of a reference Issuer . These notes pay

Do you provide assignment help on Miller and Modigliani Model? Do you have experts in this topic? I have an assignment and it is tough to solve me. Please suggest me if you can giv

Q. What are the benefits as well as costs of holding inventory? What is Inventory? What are the benefits as well as costs of holding inventory? Ans. Inventory: - Every enter

a) On 1 st January 2010, Grimm issued 400,000 convertible £1 6% debentures  for £600,000.  The professional fees associated with the issue were £40,000 and the fair value of simil

a) Variable costs: Remuneration of flight attendants, Meals and drinks onboard, Fuel. Fixed costs: promotions and Advertising, Remuneration of administrative staff and Airport c

Q. Explain Inventory approach to cash management? This method analysis cash in the same way as engine inventory such that EOQ models may be employed. In such conditions cash

Plugging back of the future of profit means the reinvestment by the concerns of its surplus in the business. it is an internal financial of the business and it is more suitable for

Q. What do you signify by Cost of Capital? What do you signify by 'Cost of Capital'? What is its meaning and what are the problems in determination of cost of capital? Ans.

Tests in Investments There are many rules that specify how the past data of share prices can be used to obtain a clue regarding the future prices of shares. Such rules would be

Q. What is Unsanctioned Expenditure? The expenditure, which is regularly incurred without the sanction of the competent authority or beyond the sanctioned limit of funds provid