Investment Appraisal Techniques and their Limitations
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Added on 2019-09-13
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Understand the different investment appraisal techniques like NPV, IRR, Payback period, ARR, discounted cash flow methods and their limitations. These techniques help management to decide about investing in Projects however these techniques have certain limitations.
Investment Appraisal Techniques and their Limitations
Added on 2019-09-13
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(a)Calculation of DepreciationMachine A =125000 - 250003=1000003=33333Machine X =600005=12000Machine B =1250006=20833Calculation of Cash Inflow of Project A201620172018201920202021Net Profit600006000060000500005000040000Add: Depreciation333333333333334120001200012000Cash Inflow933339333393334620006200052000Calculation of Cash Inflow of Project B201620172018201920202021Net Profit200003000040000700008000065000Add: Depreciation208332083320833208332083420834Cash Inflow4083350833608339083310083485834Calculation of Net Present ValueProject AYearCash FlowPVF@20%Present Value of Cash Flow-1250001 -1,25,000 2016933330.833
77,746 2017933330.69464,773 2018933340.57954,040 2018-350000.579 -20,265 2019620000.48229,884 2020620000.40224,924 2021520000.33517,420 240000.3358,040 NPV of Project A1,31,563 Project BYearCash FlowPVF@20%Present Value of Cash Flow-1250001-1250002016408330.83334013.8892017508330.69435278.1022018608330.57935222.3072019908330.48243781.50620201008340.40240535.2682021858340.33528754.39NPV of Project B92585Calculation of IRRInternal Rate of return of project is the rate of return at which Net present value of project will be zero. Project ALet us assume that rate of return is 59.50 %YearCash FlowPVF@59.50%Present Value of Cash Flow-1250001 -1,25,000 2016933330.62658,454 2017933330.39336,680
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