Investment Appraisal Techniques: Comparative Analysis of Projects

This report provides a comprehensive analysis of investment appraisal techniques, focusing on the evaluation of two projects (Project A and Project B) using methods such as Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Average Rate of Return (ARR). The calculations for each technique are detailed, highlighting the cash inflows, discounting factors, and present values. The report discusses the benefits and disadvantages of each appraisal method, emphasizing the importance of considering factors like time value of money and risk. Sensitivity analysis is briefly addressed, noting the equal rate of return for both projects. Ultimately, the report concludes that based on the negative NPV of both projects, neither investment is advisable, and it underscores the utility of NPV as a decision-making tool. Desklib is a platform where students can find similar solved assignments and study tools to enhance their understanding.

Investment Appraisal
Techniques

Contents
INTRODUCTION...........................................................................................................................4
MAIN BODY..................................................................................................................................4
1. Compute the return using various techniques of each project.................................................4
2. Explain the benefits and disadvantages of investment appraisal techniques...........................8
3. Comment of the stability and sensitivity analysis of the project...........................................10
4. Rank the project using all the methods and advice one project best for the investment.......10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Investment appraisal techniques means to assess the performance of a new project. It is used
for computing the return on the proposal which has been proposed and invested in by the
company. It is helpful in making decisions (Araujo and Teixeira, 2021). In this report, these
techniques are used accordingly to the one best techniques a project from the two proposed
project is chosen.
MAIN BODY
1. Compute the return using various techniques of each project.
Payback Period
Project A Project B
Year Annual Cash
Inflow
Cumulative
Cash Inflows
Annual
Cash
Inflow
Cumulative Cash
Inflows
0 -1000 0 -1000 0
1 70 70 100 100
2 80 150 0 100
3 90 240 400 500
4 100 340 0 500
5 110 450 100 600
6 120 570 200 800
7 130 700 0 800
8 140 840 100 900
9 150 990 0 900
10 210 1200 300 1200
Payback period = Number of years completed + (Total amount invested – cash flow received
cumulatively) / cash inflow in that year
Project A = 9 + (1000-990) / 210
= 9 + 10 / 210

= 9 + 0.05
= 9.05 years
Project B = 9 + (1000-900) / 300
= 9 + 100 / 300
= 9 + 0.33
= 9.33 years
Calculation of Net present value of Project A and Project B
Years
Net
Cash
Inflows
Discounting
@ 5%
PV of
Cash
Inflows
Net
Cash
Inflows
Discounting
@ 5%
PV of
Cash
Inflows
1 70 0.952 66.64 100 0.952 95.2
2 80 0.907 72.56 0 0.907 0
3 90 0.864 77.76 400 0.864 345.6
4 100 0.823 82.3 0 0.823 0
5 110 0.784 86.24 100 0.784 78.4
6 120 0.746 89.52 200 0.746 149.2
7 130 0.711 92.43 0 0.711 0
8 140 0.677 94.78 100 0.677 67.7
9 150 0.645 96.75 0 0.645 0
10 210 0.614 128.94 300 0.614 184.2
PV of Cash
Inflow (A) 887.92 920.3
PV of Cash
Outflow (B) 1000 1000
Net Present
Value (A-B) -112.08 -79.7
Calculation of IRR
Years Cash Discounting Factor PV value of cash

inflows @ 5% inflow
1 70 0.952 66.64
2 80 0.907 72.56
3 90 0.864 77.76
4 100 0.823 82.3
5 110 0.784 86.24
6 120 0.746 89.52
7 130 0.711 92.43
8 140 0.677 94.78
9 150 0.645 96.75
10 210 0.614 128.94
Total Cash inflow 887.92
Total Cash outflow 1000
NPV (A-B) -112.08
Years
Cash
inflows
Discounting Factor
2%
PV value of cash
inflow
1 70 0.98 68.6
2 80 0.961 76.88
3 90 0.942 84.78
4 100 0.924 92.4
5 110 0.906 99.66
6 120 0.888 106.56
7 130 0.871 113.23
8 140 0.853 119.42
9 150 0.837 125.55
10 210 0.82 172.2
Total Cash inflow 1059.28
Total Cash outflow 1000
NPV (A-B) 59.28

IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
Project A = 2 % + 59.28 / (59.28+112) * (5-2)
= 2% + (59.28 / 171.28) * 3
= 2% + 0.35 * 3
= 2% + 1.05
= 3.05%
Calculation of IRR of Project B
Years
Cash
inflows
Discounting Factor
@5%
PV value of cash
inflow
1 100 0.952 95.2
2 0 0.907 0
3 400 0.864 345.6
4 0 0.823 0
5 100 0.784 78.4
6 200 0.746 149.2
7 0 0.711 0
8 100 0.677 67.7
9 0 0.645 0
10 300 0.614 184.2
Total Cash inflow 920.3
Total Cash outflow 1000
NPV (A-B) -79.7
Years
Cash
inflows
Discounting Factor
2%
PV value of cash
inflow
1 100 0.98 98
2 0 0.961 0
3 400 0.942 376.8
4 0 0.924 0
5 100 0.906 90.6

6 200 0.888 177.6
7 0 0.871 0
8 100 0.853 85.3
9 0 0.837 0
10 300 0.82 246
Total Cash inflow 1074.3
Total Cash outflow 1000
NPV (A-B) 74.3
Project B = 2 % + 74.3 / (74.3+ 79.7) * (5-2)
= 2% + (74.3 / 154) * 3
= 2% + 0.48 * 3
= 2% + 1.44
= 3.44%
Average Rate of Return:
ARR = Annual Average Profits / Cost of Investments * 100
Project A= (120 / 1000) * 100
= 12%
Where, Annual Average Profits = 1200/10
= 120
Project B = (120 / 1000) * 100
= 12%
Where, Annual Average Profits = 1200/10
= 120
2. Explain the benefits and disadvantages of investment appraisal techniques.
Payback Period: It means time to be taken to recover the cost of an investment and how much
time to take back the investment.

Advantages Disadvantages
1. It is easy to calculate It is disregards for all early cash flows of
payback period hence it is more likely to be
unprofitable.
3. It stands for early return, outlook of which
are likely to be accurate
It discriminate projects which take long
payback period (Baek and et.al.,2022).
Internal Rate of Return: It is the value of discount rate which makes the net vale of cash flow is
equal to zero for a particular project and investment. Project should be accepted when IRR is
greater than rate of interest.
Advantages Disadvantages
1. It integrates the time value of money into the
calculation.
Assumption take place when average rate of
return is not close to the internal rate of return
2. It is easy to calculate It is a boring and frustrating calculation
(England and et.al., 2020).
Net Present value: It is It is the difference between present values of cash inflows and outflows
over a period of time.
Advantages Disadvantages
It gives permission to the risk factors to enter
into the calculation.
It is based on assumption to get net present
value
It takes considered the cost of capital and risk
factors
It only focused on short term projects
Accounting Rate of Return: It is expected rate of return on an investment.
Advantages Disadvantages
1. It is a easy way which uses the profit from
an investment to quickly know the return
It is only based on accounting profits and does
not consider the cash inflows, taxes, etc.

2. Calculation and analysis is easy in payback
pattern over the economic life of the project
It cannot be useful where investment in a
project is made at different times or in parts
(Kauko, 2018).
3. Comment of the stability and sensitivity analysis of the project.
For analysis the sensitivity of the project, the rate of return is a must to compute. In the
project A the ROR is 12 of both the project A and B. Hence the sensitivity in both the project is
equal.
4. Rank the project using all the methods and advice one project best for the investment.
The best method n the investment appraisal technique is of Net present value. In this the
NPV of project A is -112.08 and Project B is -79.7. From this it can be said the method of NPV,
both the project will give a negative return to the company. So the organisation should not invest
in both the projects (Singh and Sharma, 2022).
CONCLUSION
From the above, it can be asserted that the Net present value is the best techniques which is
used for the decision – making and for the betterment of the firm. The above states the
calculation of the return on the basis of the investment made on both the projects. Further, one of
the best project is selected according to the method which will be better for the company.

REFERENCES
Books and Journals
Araujo, R.A. and Teixeira, J.R., 2021. An appraisal of neo-Kaldorian theories from a structural
economic dynamics perspective. Structural Change and Economic Dynamics, 59,
pp.247-255.
Baek, Y., and et.al.,2022. Economic Evaluations of Child Nutrition Interventions in Low-and
Middle-Income Countries: Systematic Review and Quality Appraisal. Advances in
Nutrition, 13(1), pp.282-317.
England, J., and et.al., 2020. Seeking river restoration appraisal best practice: Supporting wider
national and international environmental goals. Water and Environment Journal, 34,
pp.1003-1011.
Kauko, T., 2018. Innovation in urban real estate: the role of sustainability. Property
Management.
Singh, A.K. and Sharma, V., 2022. A comparative appraisal of sustainable strategy in Ultrasonic
Assisted Grinding of Nimonic 80A using novel green atomized cutting
fluid. Sustainable Materials and Technologies, p.e00423.