Investment project evaluation is an important matter for companies. There are often a variety of different investment opportunities amongst which a company can choose or there is the problem of capital rationing in which limited capital is available for investment. Whatever the particular problem, companies need tools to aid them in selecting the correct opportunity, so that the maximum possible value will be added and they need to be able to do so without referring back to the shareholders and to ask them for their particular preferences.
There are various methods of investment appraisal, of which three will be discussed and implemented here in order to supply the company directors with the bes possible advice. The first being the Net Present Value (NPV) calculation that considers relevant future cash flows and subsequently discounts them at the opportunity cost of capital (the Internal Rate of Return (IRR) is similar and will be discussed in more detail later) and the other being the Accounting Rate of Return (ARR) that bases its analysis upon pure, non-discounted, accounting data.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Relevant Cash Flows
- Table 1
- NPV and IRR Calculations
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This assignment aims to evaluate an investment project proposal for a company, using different methods of investment appraisal, specifically Net Present Value (NPV), Internal Rate of Return (IRR), and Accounting Rate of Return (ARR). The goal is to provide directors with comprehensive advice for selecting the most profitable investment opportunity.
- Identifying relevant cash flows for project appraisal
- Calculating the Net Present Value (NPV)
- Determining the Internal Rate of Return (IRR)
- Understanding the application of investment appraisal methods in real-world scenarios
- Assessing the importance of opportunity cost of capital in project evaluation
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: The assignment introduces the importance of investment project evaluation for companies, outlining the need for effective tools to aid in selecting the best investment opportunities. It highlights the three methods of investment appraisal that will be explored: NPV, IRR, and ARR.
- Relevant Cash Flows: This section delves into the crucial aspect of identifying relevant cash flows for accurate project appraisal. It explains the criteria for determining which cash flows should be considered, emphasizing the distinction between past, present, and future cash flows, as well as their impact on the project.
Schlüsselwörter (Keywords)
The key terms and concepts discussed in this assignment include investment project evaluation, Net Present Value (NPV), Internal Rate of Return (IRR), Accounting Rate of Return (ARR), relevant cash flows, opportunity cost of capital, sunk costs, depreciation, and incremental cash flows.
- Quote paper
- Andrew Brabner (Author), 2002, Corporate Finance - Assignment One, Munich, GRIN Verlag, https://www.grin.com/document/7643
