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Investment Appraisal tools and techniques are used by many organizations in the private and public sectors . Critically evaluate - Essay Example
Author : natashabednar
Finance & Accounting
Pages 3 (753 words)
Investment appraisal tools and techniques Name Instructor Task Date Introduction This paper presents a summary and a critical writing about different company valuation methods and their significance regarding the determination of the fair value. The selected methods to be analyzed are the discounted cash flow as presented below…
The decision rule based on this method is that, if the payback period of an investment lies within investors required range of duration, the investment is considered. The method is simple to use. However, it ignores the concept of time value of money (Damodaran 2008, pp. 277). Net present value- in this method, both the cash inflows and outflows are discounted. The discounted outflow is subtracted from the sum of discounted cash inflows to obtain the net present value. The discounting rate is selected based on the cost of finance. According to this method, an investment should be accepted if the net present value is greater or equal to zero. Therefore, a company with a positive net present value is considered of more value. The proponents of this method assert that it is advantageous because it takes into account the time value of money. Secondly, it conforms to the objective of shareholder wealth maximization. Lastly, it takes into account all the cash flows. Therefore, it is realistic concerning the estimation of return on investment. On the other hand, opponents of the method assert that it is disadvantageous because it ignores the element of risk and the concept of payback period (Scho?n 2007, pp. 501). ...