investment appraisal

• benefits of npv:

  1. Considers time value of money: NPV takes into account the concept of the time value of money by discounting future cash flows to their present value. This allows for a more accurate assessment of the profitability of an investment.
  2. Measures profitability: NPV calculates the net value of an investment by deducting the initial investment cost from the present value of future cash inflows. It provides a measure of the project's profitability and helps in decision-making by comparing the value of different investment options.
• benefits of npv:

  1. Considers all cash flows: NPV considers both positive and negative cash flows throughout the project's life, including initial investments, operating costs, and future revenues. This comprehensive analysis helps in understanding the overall financial impact of an investment.
  2. Reflects the company's cost of capital: NPV incorporates the discount rate, which represents the company's cost of capital or required rate of return. By comparing the NPV with the discount rate, it is possible to assess whether the investment is generating returns higher than the cost of capital.
• limitations of npv:

  1. Relies on estimated cash flows: NPV requires accurate estimation of future cash flows, which can be challenging, especially for long-term projects. Errors or uncertainties in cash flow projections can significantly affect the calculated NPV and lead to incorrect investment decisions.
  2. Ignores non-monetary factors: NPV focuses solely on financial metrics and does not consider qualitative factors such as environmental impact, social benefits, or strategic implications. It may overlook important aspects that are not directly reflected in monetary terms.
• limitations of npv:

  1. Requires a discount rate estimation: Determining an appropriate discount rate for discounting future cash flows can be subjective. The choice of discount rate impacts the calculated NPV and can vary based on factors like risk, opportunity cost, and company policies.
• benefits of payback:

  1. Simplicity and ease of understanding: The payback period is a straightforward method that provides a simple measure of the time required to recover the initial investment. It is easy to calculate and understand, making it accessible to a wider range of stakeholders.
  2. Risk assessment: The payback period helps assess the risk associated with an investment. A shorter payback period implies a quicker recovery of the initial investment, reducing the exposure to uncertainties and potential risks.
• benefits of payback:

  1. Liquidity consideration: The payback period is particularly useful in situations where liquidity and cash flow management are critical factors. It helps identify investments that generate early cash inflows and enable faster reinvestment or debt repayment.
• limitations of payback:

  1. Ignores the time value of money: not consider the concept of the time value of money. It treats all cash flows equally, regardless of their timing or present value. This limitation can lead to inaccurate evaluations, as it fails to capture the opportunity cost of money over time.
  2. Focuses on recovery, not profitability: The payback period emphasizes the recovery of the initial investment and does not account for the profitability beyond that point. It fails to consider the total return or the net value generated by the investment over its entire life.
• limitations of payback:

  1. Ignores cash flows beyond the payback period: The payback period does not consider cash flows that occur after the payback period is reached. This limitation can result in an incomplete assessment of the investment's long-term financial viability.
• Investment appraisal describes how a company might objectively evaluate an investment to determine whether or not it is likely to be profitable.  
• Payback is a simple technique that measures the time period required for the earnings from an investment to recoup its original cost. 
• discounted cash flow method of investment appraisal takes into account the time value of money (i.e. the realisation that the value of money changes over time).calculates the net present value (NPV) of alternative options/projects.
•  NPV is the value of future money if you had it now (takes into account inflation and the potential for earning interest on investment capital or cost of finance on raising investment capital).
• Net cash flow is the difference between all the company's cash inflows and cash outflows in a given period.