Investment appraisal and NPV analysis Essay Example | Topics and Well Written Essays - 2000 words

Investment estimate and NPV analysis - turn out ExampleCapital Budgeting is the other name for Investment Appraisal. Every theatre, telephoner or enterprisingness is approach with the decision active which localisement opportunities they atomic number 18 to choose from all the options available. The primary task of any enterprise is to maximize the wealth of its shargonholders. So taking the right decision at right time is mavin 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 pileus assets, so that they get returns out of it which they can utilize either to reinvest once more or to pay back its owners (Peterson & Fabozzi, 2002, p.3). Investments in assets can be of both short-term and long-term types further every firm is primarily concerned with long-term enthronization requiring huge amounts of money. Thus, decision on capital budgeting take fo r a long-term effect on the performance of the firm and are critical to the firms success or failure. Financial appraisal or enthronization appraisal of a proposed investment in a firm is one of the key steps in capital budgeting and quite manifold too (Dayananda, 2002, p.2). Thus proper valuation of the proposed investment projects of a company is required before feeler to the conclusion about which investment proposal to accept. Some of the tools or techniques apply by firms for investment appraisal are a) Net Present Value (NPV), b) Internal Rate of Return (IRR), c) Profitability Index (PI), d) be Rate of Return, e) manu featureureback Period, etc (Shapiro, 2008, p.33). Of these NPV and IRR techniques are mostly used by companies for investments which are capital intensive and requital Back Period technique, which is more of a traditional technique and mostly used by companies which are less capital intensive (Bedi, 2005, p.14). Now, NPV being one of the most widely used c onventional tools for investment appraisal uses the Discounted Cash Flow (DCF) technique for the evaluation of proposed investments. But it can always be argued about DCF technique used in NPV analysis as being the effective and adequate technique and its relevance with business environment in real(a)ity. NPV option is always questionable when uncertainty is involved in the real business environment. Once an investment has already begun, it is very difficult to revise the investment decisions of a company using NPV analysis for its investment project appraisal. Thus, NPV analysis has its own merits and demerits in the evaluation of investment projects which have been discussed further in this study. A comparative study of two other alternative appraisal techniques to NPV is in any case discussed in this study. Further, what can be a more realistic approach to investment appraisal has also been discussed in details. Investment Appraisal Approaches Different approaches are adopted by different companies for evaluating their investment proposals in order to come to a decision about which investment proposal will be silk hat for the company. Out of the many, Pay Back Period technique is one of the traditional approaches in this regard. NPV analysis and IRR techniques are commonly used investment evaluation techniques which uses the DCF technique. Risk-adjusted Present Value (RPV) analysis is one of the recently used investment appraisal technique which takes into account the risk factors involved in the investment valuation payable to uncertainties present in real business environment. The concept of break-even analysis in investment is applied through and through the Pay Back Period method of investment appraisal technique (Banerjee, 1990, p.317). This method takes into consideration the fact that it is important to identify the recovery period of investment made originally by a company. Pay Back Period can be calculated from the following relation Pay