Post on 29-Jan-2015
description
PROJECT APPRAISAL METHOD
PROJECT APPRAISA
L METHOD
PAY BACK PERIOD
AVERAGE RATE OF RETURN
NET PRESENT
VALUE
PROFITABILITY INDEX
INTERNAL RATE OF RETURNS
TIME REQUIRED TO RECOVER ORIGINAL INVESTMENT
SIMPLE & WIDELY USED METHOD FORMULA:-
PAY BACK PERIOD
PAY BACK PERIOD
MERITS:-1. BEST WHEN PROJECT HAVE
SHORTER PERIOD & LESS COST2. EASY TO OPERATTE & SIMPLE
TO UNDERSTAND3. HELPS TO ENTERPRENEUR TO
INVEST IN QUICK RETURN FUNDS
PAY BACK PERIOD
DEMERITS:-1. MORE ON LIQUUIDITY THEN
PROFITABILITY2. NOT COVER THE EARNING
BEYOND PAY BACK PERIOD3. SUITABLE FOR SMALL PROJECT4. IGNORES COST OF CAPITAL
PAY BACK PERIOD
BETTER THAN PAY BACK PERIOD METHOD CONSIDERS EARNINGS OF FULL PROJECT
DURING IT’S ECONOMIC TIME ALSO KNOWN AS RETURN ON INVESTMENT
(ROI) FORMULA:-
RETURN ON INVESTMENT
AVERAGE RATE OF RETURNS (ARR)
MERITS:-1. SIMPLE TO CALCULATE & EASY TO
UNDERSTAND2. CONSIDER EARNING OF FULL LIFE3. HELPS TO COMPARING WITH
OTHER PROJECTS4. CONSIDER NET EARNINGS AFTER
DEPRECIATION & TAXES
AVERAGE RATE OF RETURNS (ARR)
DEMERITS:-1. IGNORES TIME VALUE OF MONEY2. MORE FOCUS ON PROFIT & LOSS3. NOT CONSIDER RE-INVESTMENT
OF PROFIT OVER YEARS4. NOT COMPARE BETWEEN SIZE
OF INVESTMENT
AVERAGE RATE OF RETURNS (ARR)
CONSIDER TIME VALUE OF MONEY IT COMPARE RUPEE VALUE OF TODAY & AFTER A
YEAR CALCULATE BY PRESENT VALUE FORMULA:-
WHERE, S= CASH FLOW
N= NO. OF YEARS
R= INTEREST RATE
NET PRESENT VALUE
PRESENT VALUE
NET PRESENT VALUE
MERITS:-1. CONSIDER TIME VALUE OF
MONEY2. SCIENTIFIC METHOD3. COVERS WHOLE PROJECT4. FUTURE FLOW IN TODAYS VALUE5. OBJECTIVE OF MAXIMUM
PROFITABILITY
NET PRESENT VALUE
DEMERITS:-1. DIFFICULT TO CALCULATE2. BIASED TOWARDS SHORT RUN
PROJECTS3. NOT CONSIDER NON-FINANCIAL
ACTIVITY LIKE MARKETABILITY
RATIO OF PRESENT VALUE OF INFLOW & OUTFLOW
PROFITABILITY RATIO OF PROJECT MORE THAN 1 IS TO BE SELECTED
FORMULA:-
PROFITABILITY INDEX
PROFITABILITY INDEX
PROFITABILITY INDEX
MERITS:-1. CONCEPTUALLY SOUND2. CONSIDER TIME VALUE OF
MONEY3. FACILITATES RANKING OF
PROJECT
PROFITABILITY INDEX
DEMERITS:-1. COMPUTATION PROCESS IS
COMPLEX2. DIFFERENT INTERPRETATION
USE TIME VALUE OF MONEY NPV REDUCE TO ZERO
INTERNAL RATE OF RETURNS (IRR)
INTERNAL RATE OF RETURNS (IRR)
MERITS:-1. RECOGNISED TIME VALUE OF
MONEY2. CONSIDER CASH FLOW FOR
WHOLE LIFE3. TAKES INTO ACCOUNT TRUE
VALUE OF MONEY4. OBJECTIVE OF MAXIMISING
OWNER’S WELFARE
INTERNAL RATE OF RETURNS (IRR)
DEMERITS:-1. DIFFICULT TO UNDERSTAND & USE2. DECISION MAKING IS DEPENDS ON
THE FUTURE FINANCIAL PROJECTION
3. IT ASSUMES THAT RE-INVESTMENT RATE OF CASH FLOW IS AT IIR
conclusionProject appraisal is necessary for knowing project is viable or not?
It is vary useful for entrepreneur.
Various methods to calculate project is viable or not entrepreneur use the suitable one.