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Investment appraisal and NPV analysis - Essay Example
Finance & Accounting
Pages 8 (2008 words)
Capital Budgeting is the other name for Investment Appraisal. Every firm, company or enterprise is faced with the decision about which investment opportunities they are to choose from all the options available. …
Capital Budgeting is the other name for Investment Appraisal. Every firm, company or enterprise is faced with the decision about which investment opportunities they are to choose from all the options available. The primary task of any enterprise is to maximize the wealth of its shareholders. So taking the right decision at right time is one of the key roles of any company. It is required for the profitability and sustainability of the company. More often than not every enterprise has to invest in assets, mainly capital assets, so that they get returns out of it which they can utilize either to reinvest again or to pay back its owners (Peterson & Fabozzi, 2002, p.3). Investments in assets can be of both short-term and long-term types but every firm is primarily concerned with long-term investment requiring huge amounts of money. Thus, decision on capital budgeting have a long-term effect on the performance of the firm and are critical to the firm’s success or failure. Financial appraisal or investment appraisal of a proposed investment in a firm is one of the key steps in capital budgeting and quite complex too (Dayananda, 2002, p.2). Thus proper valuation of the proposed investment projects of a company is required before coming to the conclusion about which investment proposal to accept. Some of the tools or techniques used by firms for investment appraisal are: a) Net Present Value (NPV), b) Internal Rate of Return (IRR), c) Profitability Index (PI), d) Accounting Rate of Return, e) Payback Period, etc (Shapiro, 2008, p.33). ...