Project Evaluation: Principles And Methods

Copyright 2009 McGraw-Hill Australia Pty Ltd. Chapter Project Evaluation. Principles and Methods. Learning Objectives. Understand different steps of the capital-expenditure process. Capital Expenditure Process. The capital expenditure process involves Generation of investment proposals. Investment ideas can range from simple upgrades of equipment. Evaluation and Selection of Investment Proposals. In order to. Approval and Control of Capital Expenditures. Capital-expenditure budget (CEBPost-completion Audit of Investment Projects. Highlights any cash. Methods of Project Evaluation. Different methods of project evaluation include Net present value (NPVProject Evaluation Methods Used by the Entities Surveyed. (a) The aggregate. Discounted Cash Flow Methods. Discounted cash flow. Difference between the PV of the net cash flows (NCF) from an investment. Net Cash Flow. Cash inflows Receipts from sale of goods and services. Evaluation of NPV. NPV method is consistent with the company’s objective of maximising shareholders’ wealth. Npv example. Example 5 1 Investment. NPV Example (cont. Solution Apply the NPV formula given by Equation. Internal Rate of Return (IRRThe internal rate. Calculation of Internal Rate of Return. By setting the. Calculation of Internal Rate of Return (cont. Using the cash flows of Example , the IRR is. Multiple and Indeterminate Internal Rates of Return. Conventional projects have a unique rate of return. Choosing Between the Discounted Cash Flow Methods. Independent investments Projects that can be considered and evaluated in isolation from other projects. Choosing Between the Discounted Cash Flow Methods (cont. Independent investments For independent investments. Evaluating mutually exclusive projects NPV and IRR methods can provide a different. Benefit-Cost Ratio (Profitability IndexThe profitability index. Other Methods of Project Evaluation. Two major non-discounted. Accounting Rate of Return. Earnings (after depreciation. Accounting Rate of Return (cont. Fundamental problems of. Payback Period. The time it. Payback Period (cont. Strengths It is a simple method to apply.