You are on page 1of 42

# Presentation On Investment Appraisal Technique

## Introduction of The Group

Name Nur-E-Ferdous Mohsi Nihad Mosabbir Ornab Rajesh Paul Md. Shuaib Shahriar Rusho S. M. Kaiser Ahmed Lamia Nuzhat Shashi Md. Riaz Rahman Student ID 590 613 617 620 625 1923 1929

What Is Investment?
Any act which involves the sacrifice of an

immediate and certain level of consumption in exchange for the expectation of an increase in future consumption.

## Investment Appraisal Technique

Investment appraisal is a technique or a

## Why Investment Appraisal Technique?

Investment assumes that the investment will yield future income streams. Investment appraisal is all about assessing these income streams against the cost of the investment.

## Types Of Investment Appraisal Technique

Investment Appraisal Technique

Modern Approach

Payback Period

NPV

IRR

PI

Payback Period

## Payback Period Method

The length of time required for an Investments

## Payback Period Method

Formula:

Years before full recovery + Uncovered Cost at The Start of The Year Annual Cash Flows during that year

## Payback Period Method

Example: Project A Year Investment O 1 2 3 Payback Period = 3 years 300000 100000 100000 100000 Cash flows

## Payback Period Method

Example: Project B Year O Investment 300000 Cash flows

1
2 3

150000
120000 100000

## Payback Period Method

Example: Project C Year O 1 2 3 4 Investment 300000 90000 90000 90000 60000 Cash flows

## Payback Period Method

The shorter the payback ,the better it is. So

## Payback Period Method

Widely used method of assessing an

investment.

understand.

## Payback Period Method

Ignores the value of any cash flows once

flows.

## Discounted Payback Period Method

The length of time required for an investments

cash flows discounted at the investments cost of capital to recover its cost.

## Discounted Payback Period Method

Formula:

Years before full recovery of discounted annual cash flows + Uncovered Cost at The Start of The Year Cash Flows discounted during that year

## Discounted Payback Period Method

Example: The cash flow is given in the table where discount rate or interest rate is 10% Year Investment Cash flows Discounted Cash flows O 300000

1
2

150000
120000

136364
99174

3 100000 75131 Discounted Payback Period:2 years+64462 100000 =2 years 7 months 22 days

## Discounted Payback Period Method

By considering the capital costs, it shows

## the breakeven year after covering debt and equity cost.

It ignores cash flows that are paid or

## received after the payback period

Modern Approach
Net Present Value

Modern Approach

## Internal Rate of Return

Profitability Index

## Net Present Value (NPV)

A method of ranking investment proposals

that discounts all cash flows at the projects cost of capital which are added and then the cost outlay is deducted from that total value.

## Net Present Value (NPV)

Formula:

NPV = present value of cash inflows less present value of cash outflows

## NPV= - Co + [Cn / (1 + i)n ]

Here, Co= cash outlay Cn=total cash inflows (1 + i)n=Discount factor

## Net Present Value (NPV)

Example:
The cash flow is given in the table where discount rate or interest rate is 10% Year O 1 2 3 Investment 300000 150000 120000 100000 NPV=310669-300000=10669 136364 99174 75131 Cash flows Discounted Cash flows

NPV Profile:

## Net Present Value (NPV)

Considers the time value of money Considers all relevant cash flows, so that

## Net Present Value (NPV)

Requires the calculation of discount rate.

## Internal Rate of Return(IRR)

The discount rate that forces a projects NPV

to equal zero. A project is accepted if the IRR is greater than the cost of capital.

Formula:

## IRR = L +NPVL/(NPVL-NPVH) (H-L)

Here, L=lower cost of capital H=higher cost of capital NPVL=NPV of lower cost of capital NPVH=NPV of higher cost of capital

## Internal Rate of Return(IRR)

Example:
The cash flows of a project with 10% cost of capital is given below:
Year o Investment 100000 60000 70000 50000 .909 .826 .751 54540 57820 37550 Cash flow DF Present V

NPV=49910

## Internal Rate of Return (IRR)

The cash flows of a project with 20% cost of capital is given below:
Year o Investment Cash flow 100000 60000 70000 50000 .833 .694 .578 49980 48580 28935 DF Present V

NPV=27495

## Internal Rate of Return (IRR)

Now IRR,(using 10% and 20% cost of capital)

IRR=10%+49910/(49910-27495)(20%10%) =32.266%

IRR Acceptance:

## Internal Rate of Return (IRR)

Helps to measure the worth of an

investment

## Internal Rate of Return (IRR)

IRR is a only a process of accepting or

## NPV Vs. IRR

The NPV and IRR both make the accept and

reject decisions

projects

## ranking conflicts arise. NPV should be used then.

Profitability Index
It allows a comparison of the costs and

benefits of different projects to be assessed and thus allow decision making to be carried out.

Profitability Index
Formula:

## Net Present Value Profitability Index = --------------------Initial Capital Cost

In case of multiple projects with positive NPVs

with limited resources, PI helps to choose the project(s) that gives the highest NPV per dollar of investment.

Profitability Index
Projects A B C D E F -Co -7 -8 -4 -10 -13 -7 PV 11 15 5 6 15 10 NPV +4 +7 +1 +4 +2 +3 PI .57 .87 .25 .40 .15 .42

Profitability Index

The higher the PI, the better it is. So, Project B should be selected as it has the highest PI 0.87. Projects in ascending order

Project B

Project A

Project F

Thank You

Any Question