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Financial Appraisal - Essay Example

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C. The comments of directors are very much inconsistent. Based on definition, NPV is the present value of future cash flows after deducting the initial capital outlay. The higher the NPV is, the higher the return. On the other hand, the IRR is the discount rate that will make NPV zero…
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Financial Appraisal
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Part A. Calculate the NPV and IRR of each project. Project X Project Y NPV $29,196.6 $18,554.2 IRR 16% 18% B. Project X should be undertaken because it has higher returns indicated by the higher NPV and the lower IRR.
C. The comments of directors are very much inconsistent. Based on definition, NPV is the present value of future cash flows after deducting the initial capital outlay. The higher the NPV is, the higher the return. On the other hand, the IRR is the discount rate that will make NPV zero. The higher the NPV, this means that IRR is lower. Thus, we cannot choose a project with both higher NPV and IRR.
D. Payback's advantages include simplicity and straight-forwardness. However, it neglects cash flows after the payback period and time value of money. For ARR, the formula is also simple and easy to understand. However, it neglects time value of money and focuses on profit instead of cash flow.
Project X Project Y
Payback 3 years 1 year
ARR 150% 122.5%
Part 2
The NPV of the project presented is -$2,146.96
Part 4
When calculating the NPV in public sector projects, additional factors should be taken into considerations. Because it deals with the public sector, the analysis should go beyond financial to measure the social costs and benefits of the project. For example, even if the project is financially feasible and will yield returns, negative externalities such as pollution should also be taken into account. It should be noted that a governmental institution and the public sector is not a profit maximize but is focused in bringing the highest level of social welfare.
Post audit appraisal is essential at the end of the life of the project in order to assess if the initial goals or projections have been adequately met. This also measures the level of understanding of the company in projecting the future of a project. Through post-audit appraisal, the company can evaluate itself on why projections did not materialize. The learning from post-audit appraisal will enable the company to apply it in future project evaluations. Read More
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