Capital invistment apprisals - Essay Example

Comments (0) Cite this document
Summary
Capital Investment Appraisals (Author’s name) (Institutional Affiliation) Introduction Capital investment appraisal is a technique that is used to evaluate a business or potential investment in order to determine whether it is viable depending on the returns and risks that are likely to be involved (Bullock & Jones, 2006)…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER93.9% of users find it useful
Capital invistment apprisals
Read TextPreview

Extract of sample "Capital invistment apprisals"

Download file to see previous pages There are 5 techniques that have been employed in this particular scenario: simple payback method; accounting rate of return (ARR); net present value (NPV); and internal rate of return (IRR) (Mott, 1997). Capital Investment Appraisal Capital investment appraisal is the evaluation of the attractiveness and viability of an investment proposal, using techniques like payback period; net present value (NPV); average rate of return (ARR); or internal rate of return (IRR) (Go?tze, Northcott & Schuster, 2008). Investment appraisal is an essential part of capital budgeting and is relevant in cases where the returns cannot be easily quantified (e.g. training, marketing, and personnel). All businesses need fixed assets (capital equipment) like vehicles, premises, and machinery. The acquisition of those assets is called capital investment. Just like other business activities, capital investment comes with an element of risk and uncertainty, because costs are incurred today so as to generate some benefits in the future (Harrison, 2003). Capital investment appraisal techniques are aimed at enhancing and supporting decision making on such investment undertakings. The Appraisal Techniques i) Payback Period Method This technique is based on the time needed for the forecasted net cash flows to equal the amount of capital that has been invested in a potential investment initiative (Mott, 1997). The investment project that repays whatever capital invested in the least possible time is considered to be the most attractive (Gardner, 1998). This technique requires the following estimates: (a) amount of capital needed, and (b) the timing and amount of the net cash flows an investment generates. Advantages a) Simple to compute and easy to understand b) Suitable for risky projects where it is difficult to predict future cash flows beyond the first couple of years (for instance, IT). c) Suitable if short term cash flows are more critical to the survival of an investment than long-term cash flows. d) Suitable when there is a concern regarding gearing or borrowing. Disadvantages a) Does not factor in the time value of money (cash now is often more valuable than cash received later). b) Disregards cash flows when the payback period elapses. ii) Accounting Rate of Return While the payback period method concentrates on cash flows, the ARR concentrates on profit. It measures the forecasted average profit before tax and interest as a percentage of the average capital invested in a business venture. Advantages a) Simple to compute and easy to understand b) Caters for the entire life of an investment c) Compatible with ROCE and the performance ratio Disadvantages a) Does not account for the time value of money b) Does not offer guidance on what is a good rate of return c) Averages can be confusing and misleading d) Disregards the timing of profits e) No uniform definition of terms iii) Net Present Value This is the present value of all the present and future cash flows of an investment, discounted at those cash flows’ opportunity cost. Advantages a) Accounts for effects of inflation b) Adjust future cash flows to a PV (present value) Disadvantages a) Inflation is usually unpredictable b) The longer you go into the future the less reliable the discount ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Capital invistment apprisals Essay Example | Topics and Well Written Essays - 750 words”, n.d.)
Capital invistment apprisals Essay Example | Topics and Well Written Essays - 750 words. Retrieved from https://studentshare.org/finance-accounting/1478383-capital-invistment-apprisals
(Capital Invistment Apprisals Essay Example | Topics and Well Written Essays - 750 Words)
Capital Invistment Apprisals Essay Example | Topics and Well Written Essays - 750 Words. https://studentshare.org/finance-accounting/1478383-capital-invistment-apprisals.
“Capital Invistment Apprisals Essay Example | Topics and Well Written Essays - 750 Words”, n.d. https://studentshare.org/finance-accounting/1478383-capital-invistment-apprisals.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Capital invistment apprisals

Capital Punishment

...?Capital Punishment The doctrine of birth and death are the most obvious and the unpredictable events in the Nature. Since time immemorial such has been the nature of occurrence. With the spread of civilizations, the greed and lust of mankind reached an epitome and uncontrolled desire of achievement lead to loss of human values. The seriousness of the degradation leads to crimes, wars, battles and loss of innumerable human life. The concept of punishment came into existence among humans and even life of people was not spared in providing penalty for their ill deeds. The age –old theory of capital punishment was immensely popular among the Phoenicians, Persian, Egyptians, Romans, Greeks, Chinese...
14 Pages(3500 words)Term Paper

Capital Punishment

...Capital Punishment Introduction Capital punishment has been a controversial Since time immemorial, debate has beenranging as to the efficacy of capital punishment and how ethically right it is. Of course there are those who feel that the sentence is justified in a number of instances. Many people for example portend that when an individual has murdered another one it would be justified if he or she was to be sentenced to hang. However, there is the other group that christens the sentencing other individuals to hang as a bestial act that should not be condoned at any time. Whatever the reasons they put forward for their proposal, on very few instances will you have individual to be hanged...
4 Pages(1000 words)Essay

Social Capital

...?Social Capital Social capital is the term used to describe the s, relationships, and norms” (What is, that determine the quality and quantity of the social interactions within a society. This is the social cohesion created by the social networks, which create the cohesion necessary for societies to develop and prosper economically (What is, 2011; Sirianni & Friedland, 2011). The term social capital includes neighborhood associations and other cooperatives that foster norms of reciprocity, facilitate cooperation and communication, replicate past collaborative successes, and creates the potentiality that opportunistic individuals will not progress or reap the future benefits created by the collective(Sirianni & Friedland, 2011... ). This...
4 Pages(1000 words)Research Paper

Cultural Capital and Social Capital

...? Cultural Capital and Social Capital? Theories Cultural Capital and Social Capital? Theories Bowles and Gintis (2002) maintain that, both cultural and social capitals are important aspect within the field of sociology. Social capital is defined as a sociological concept, which relates to connection between and within social networks. Usually, this concept widely outlines the role of confidence and cooperation as well as social relation to get economic and collective results. Further, the notion created in social capital is useful in debating about civil society, which is considered central to the arguments created by...
9 Pages(2250 words)Essay

Capital

...What, if any, are the mistakes in proposal Correcting for any mistakes produce revised estimates of the company's current cost of capital and currentvalue. Brief explanation of the reasons for any revisions should be included. Hussey (1999) defined capital gearing as the relationship between the funds provided by the ordinary shareholders and the long-term funds with fixed interest charge. Companies are highly geared when the fixed charges are substantially higher than the competition. Gearing is speculative and expected to provide benefits for shareholders when the firms are performing well. The concept of gearing has always been linked with uncertainties. The results of the strategy are dependent of...
14 Pages(3500 words)Essay

Capital Budgeting - Capital investment appraisal

...Capital Investment Appraisal a) Machine A Present Value Purchase Price (1570000) Working Capital (47000) Running cost (151671) Overhaul Cost (73494) Disposal Cost (51072) Labor Cost Saved 2823414 WC Released 21432 Net Present Value £ 951609 b) Report to the Managing Director:- After carefully combining all the information provided by salesmen and management accountant, I have performed an NPV analysis of the both proposed project’s cash flows. Results have shown that NPV of Machine B is 80% greater than NPV of machine A. So, Temple Ltd. should install Machine B for more effective automation process and to reduce its production costs and operate much more cheaply...
1 Pages(250 words)Speech or Presentation

Capital

...Capital The global economic development has slowed down in the recent months in Anxiety regarding the banking and fiscal problems in the Euro segment is increasing the pressure on the global economy. The recent data suggests that the economic activities have contracted in Europe. While the US economy is estimated to have a modest growth, in Asia the growth seems to be sluggish. However, China is showing signs of sustainable and steady economic growth at 7-8 percent (Reserve Bank of Australia, 2012a). So analyzing the global economic scenario, it can be said that the growth rate at the end of 2012 is expected to be around 3.5 percent, which might pick up to 4 percent at the beginning of 2013. The prices of the Australian...
6 Pages(1500 words)Essay

Capital Budgeting

...Capital Budgeting Capital Budgeting Capital Budgeting Exercise Machine A Year 0 2 Investment (1000) Maintenance Cost (300) (300)Cash Flows (1000) (300) (300) Discount Factor (8%) 1 0.9259 0.8573 Discounted Cash Flows (1000) (278) (257) Net Present Value = 1535 Equivalent Annual Cost (EAC) = Net Present Value/ Annuity factor (t,r) EAC = 1535/ 1.7833 EAC = $ 860.7 Machine B Year 0 1 2 3 Investment (1300) Maintenance Cost (200) (200) (200) Discount Factor (8%) 1 0.9259 0.8573 0.7938 Discounted Cash Flows (1300) 185 171 159 Net Present Value = 1815 EAC = 1815/ 2.5771 EAC = $ 704.28 Equivalent Annual Cost is a method which is used to ascertain the cost of possessing an asset over the period...
2 Pages(500 words)Essay

Working Capital

...INVENTORY, PREPAIDS AND DEFERRALS IN WORKING CAPITAL of Contents Introduction 3 Inventory and Working Capital 3 Inventory can be considered as an asset as well as liability 4 Increase in working capital might not increase liquidity 4 Inflated working capital due to inclusion of obsolete inventory 4 Inventories can be overvalued 5 Inventories might not be as liquid as estimated 5 Prepaid and Deferred Expenses and Working Capital 5 Prepaid and Deferred Expenses cannot be easily liquidated 6 Prepaid and Deferred Expenses might be unrelated to business activity 6 Changes in Prepaid and Deferred Expenses does not reflect changes in company’s...
8 Pages(2000 words)Coursework

The Capital Buffer and Capital Planning-Banks

...The Article Capital Buffer and Capital Planning-Banks The primary objectives of the author of this article are to highlight the capital requirements of the Basel Capital Accord to identify, assess and aggregate all possible types of uncertainties relevant to them and underpin them. The article highlights two pillars that address on adequate capital defense. It defines the requirements that contribute to the abolition of miscellaneous behavior that has a negative effect on the overall financial position of an organization. The articles highlight various requirements of financial institutions under Pillar 2. He advocated for categorization as an important...
2 Pages(500 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Capital invistment apprisals for FREE!

Contact Us