Slide Investment Appraisal - Essay Example

The non-discounting factors do not take into consideration the time value of money and therefore are considered inferior to discounted cash flow techniques. Concerning the projects in this paper, both kinds of techniques have been considered, namely NPV and the payback method (Bierman and Smidt, 2012). NPV is one of the most preferred discounting techniques deployed in investment appraisal. In this method, future inflows are converted into present value by discounting them using a discount factor.

The main benefit of discounting inflows is that it helps understand the actual worth of the inflows and reflects the impact of inflation and potential risks on the investment. Generally, the cost of capital is considered an appropriate discounting measure because it is developed using the existing market risk factor. There are two criteria for accepting a project: first, NPV should be positive, and second, a project with the highest NPV should be selected. Negative NPV-bearing projects are rejected because they would generate a negative return in the long run (Sangster, 1993; Savvides, 1994).

It was observed that none of the projects of Jones & Simpson Ltd generate a positive NPV. Project A generated a negative value while Project B was observed to break even. Breakeven stands for a no-profit / no-loss situation. If the company has no other choices besides projects A and B, Project B is recommended because project A involves more investment and will generate a negative return in the long run. The payback period is one of the non-discounting techniques used by managers for evaluating projects.

However, this technique is used along with other discounting techniques so that the time factor is not neglected. Generally, managers analyze projects using NPV, IRR, and payback period together. One of the key benefits of the payback period is that it focuses on cash flow instead of accounting for profit. The determination process is also very simple for the payback period and the method helps in providing a clear picture of the rapidness with which the initial investment is recovered (Bierman and Smidt, 2012; Lefley, 1996).