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.