Methods of Analyzing Investment

Capital Budgeting Methods

There are two process of analyzing the viability of such investment as:

a) Traditional process

1. Payback period process
2. Accounting rate of return process

b) Modern process or like Discounted cash flow techniques

1. NPV - Net present value process
2. IRR - Internal rate of return process
3. PI - Profitability index process

For the above two (a and b) process to be utilized, they have to meet the following as:

i) They should rank ventures available in the investment market according to their viability that is they should identify such process is more viable than others.

ii) They should rank a venture first whether the venture brings in return earlier and in large lump sums than whether a venture brought in late and less inflows over the same time.

iii) Should rank any type of other projects as and when it is obtainable in the investment market.  That process should take into account such all returns or inflows, must be cash returns as it is essential to be able to finance the cost of the venture.