Investment Appraising Methods

Investment Appraising Methods Introduction The business environment is dramatically changing; investors are more concise and critically evaluate the trends in the market before channeling their cash into any business projects.Advertising We will write a custom report sample on Investment Appraising Methods specifically for you for only $16.05 $11/page Learn More Seitz and Ellison (1995) explains that, before venturing into business projects, investors need to understand investment appraisal methods or capital budgeting techniques; these are regarded as the standard project evaluating methods that help the investor understand the viability of any project. This paper is aimed at discussing and describing the investment appraisal methods that are essential and most appropriate in evaluating an investment project. Under this paper, we shall look at NPV, IRR, Payback period, and ARR. Discussion Net Present Value Net present value is difference between the present value of cash inflows and the present value of cash outflows. In essence, NPV is the present value of future cash flows minus the purchase price (Arnold, 2007). In capital budgeting NPV is used to analyze the profitability of an investment project. The analysis in this case is tied to the reliability of future cash inflows in relation to an investment project will yield. NPV is calculated using the formula: CF0 = Cash flow at time zero, CF1 = Cash flow after one year, K = the opportunity cost of capital and n = number of yearsAdvertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More NPV is used in investment decision-making as it helps in calculating how much an investment project will return to the investor in a given period. The criterion for accepting an investment is that accepts all projects that have a positive net present value unless they are mutually exclusive or there is capital rationing. Consequently, if the cash flow is a negative value, then the project is in a discounted cash outflow status as at that time (Bowlin and Scott, 1990). Investments with a positive NPV are essentially best ones to invest in (accepted). For example if: NPV 0 this means that the investment is capable of earning returns to the investor and therefore, the project may be undertaken. In this case, if there is more than one project under consideration, the one with the highest NPV should be given priority. NPV 0 this means that the project will require the investor to add in more money for the investment to run. This kind of investment projects are unacceptable and hence not worth venturing into them. NPV = 0 this means that the investment will neither gain nor lose value. This kind of projects does not add any monetary value to the investor. Decision on such a project is based on criteria such as strategic positioning. Internal Rate of Return As explained by Gitman (2000), this is the discount rate at whi ch the net present value is zero, it is used in capital budgeting which makes the net present value of all cash flow from an investment project equal to zero. For instance, the higher the internal rate of return, the more profitable the project. In this case, a project with the highest internal rate of return should be undertaken as compared to those with lower IRR. In some cases, IRR is said to be the rate of growth of an investment project is expected to generate.Advertising We will write a custom report sample on Investment Appraising Methods specifically for you for only $16.05 $11/page Learn More The IRR is given by r in the formula In this case if: K r; the opportunity cost is greater than the internal rate of return, the investment project should not be undertaken (reject) K r the opportunity cost is less than or equal to the internal rate of return, the project should be undertaken. Payback Period This is the period required for the return on inv estment to repay the sum of the initial investment (Eisenberg, 1996). It is the length of time required to recover the cost of an investment. It is calculated using the formula Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More In calculating the payback period, the time value of money is not taken into consideration. Intuitively, payback period measures the time that a project takes to pay for itself. Shorter payback periods are preferred as compared to longer ones. Results Option A Payback Period This is the time needed in order for the project to pay for initial capital. It has its limitations but it is an easy gauge to add to an analysis of how profitable and good a project is. The shorter the payback is, the better it is as an investment for the company. In option 1, the payback period is 6.15 years as shown in appendix 1and critical acceptance level is 2.75 years. Using this criterion, the project is not acceptable. Internal Rate Return The internal rate of return is 7% that is rates that will yield zero NPV when compared with the negative cash flow of 2.5 million or initial outlay for the project. From this vantage point, it is not a good idea to go ahead with the project simply because the rate o f return is lower than the cost of capital at 12% already. Net Present Value The net present value of a project represents how profitable it will be for the company by using its future cash flow and discounting its value. If its value is bigger than the initial investment, then it is a good investment. The length of years used to calculate the net present value however could affect the NPV that is why it is also of critical importance to determine the correct length of years to use in the analysis. In this case, the option 1 seems to be unprofitable from the NPV point of calculation that is negative of $694,575 as shown in appendix 1. Option A Payback Period the payback period as indicated in appendix 2 is 3.54 years and critical acceptance level is 2.75 years. According to these criteria, the project is not acceptable as the Payback period is lower than critical acceptance level of 2.75 years. Internal Rate Return – the IRR of the project is 18% as shown in appendix 2 and the cost of capital is 12%. According to this criterion, the project is acceptable. Net Present Value – The expected NPV is $ 64,656. The figures of present are already higher than the initial capital outlay by $ 64,656. The only flaw in this analysis would be the length of time used to determine the computation. According criteria the project is acceptable. Recommendation It can be said that the best method for appraising investments is the discounted cash flow methods. This implies that the IRR and NPV provide best options. Gitman (2000) as noted since payback method ignores cash flows occurring after the payback period, it cannot be applied alone because it only gives a general view. On the other hand, IRR is simple to understand but full of shortcomings. Accordingly, it is NPV, which is the best and most reliable appraisal method since it provides a detailed approach. In view of the above assertions, the best option in this case is option B because it has a positive net p resent value and IRR that is greater the cost of capital of 12%. Option A will not be acceptable using any of the three criterions considered in the analysis. References Arnold, G. (2007). Essentials of Corporate Financial Management. London: Financial Times / Prentice Hall. Bowlin, M. Scott, G. (1990). Guide to Financial Analysis. New York: McGraw-Hill. Eisenberg, R (1996). The Money Book of Personal Finance. New York: Warner Books, Inc. Gitman, L. (2000). Principles of Managerial Finance. London: Addison Wesley Longman. Seitz, N. Ellison, M. (1995). Capital Budgeting and Long-term Financing Decisions. Houston: Dryden Press. Appendix Appendix 1- Option 1 Appendix 2- Option 2 Year 0 1 2 3 4 5 6 7 8 9 10 Capital cost (2,500,000) (500,000) operating and maintenance cost After tax operating Expenditures ($50,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) benefits $0 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 Free cash flow (2,500,000) $200,000 $650,000 $650,000 $650,000 $650,000 $650,000 $650,000 $650,000 $650,000 $650,000 Required rate of return 12% Discount Factor 1 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.36061 0.3220 PV of free cash flow (2,500,000) $178,571 $518,176 $462,657 $413,087 $368,827 $329,310 $294,027 $262,524 $234,397 $209,283 NPV $64,656 IRR 18% Payback period total 0 1 2 3 4 5 6 7 initial cost $3,000,000 2,500,000 $500,000 net cash flows $3,300,000 $700,000 $650,000 $650,000 $650,000 $650,000 Payback period 3.54 years

12 Best Business Writing Books [Updated 2019]

12 Best Business Writing Books [Updated 2019] Because every business person needs to write well at work, there are hundreds of books specifically about business writing. I have a bookshelf and Kindle full of them because I read everything I can on this subject. Many business writing books are meh, and some are good. One problem with a book specifically devoted to business writing is that business writing is comprised of different elements of general writing. A specific business writing book can be formulaic and reductive. â€Å"Use this model† doesn’t work well when the information that goes into that model changes and requires discernment. These 12 books represent the best of the various elements that comprise good business writing. I recommend these books to clients in Instructional Solutions'business writing courses. BOOKS ON WRITING IN GENERAL How to Start, be Organized, and Not Panic 1.Bird by Bird by Anne Lamott This book is the most applicable to business writing and one of my favorite books. Anne Lamott is brilliant, funny, and breaks down the process of writing. Anything Anne Lamott writes is a joy to read. This excerpt reflects the essence: "Thirty years ago my older brother, who was ten years old at the time, was trying to get a report on birds written that he'd had three months to write. It was due the next day. We were out at our family cabin in Bolinas, and he was at the kitchen table close to tears, surrounded by binder paper and pencils and unopened books on birds, immobilized by the hugeness of the task ahead. Then my father sat down beside him, put his arm around my brother's shoulder, and said, 'Bird by bird, buddy. Just take it bird by bird.'" How to Extract the Essence 2.The Writing Life by Annie Dillard A little esoteric, but no one is better than extracting the essential core of a concept than Annie Dillard. Her advice in this book is the heart of writing an executive summary statement well. She also explores the joy and heartbreak of writing well. BOOKS ON WRITING STYLE Best How-to-Write Book 3.On Writing Well by William Zinsser This book is the classic guide on effective non-fiction writing. If I had to choose only one book to read to improve business writing, it would be this one. It will help readers write better and understand how to improve what they’ve already written. Best Current Style Book 4.The Sense of Style by Steven Pinker Its subtitle is â€Å"The Thinking Person’s Guide to Writing in the 21st Century.† Pinker is a Harvard lecturer and a master linguist. His writing is very entertaining. He takes a â€Å"descriptivist† approach to grammar, rather than a â€Å"prescriptivist,† by advocating clear language and breaking grammar rules when needed. This book is a must read for contemporary business writers, but in business writing I recommend staying with grammar rules unless clarity requires a break. Many business readers might pounce on a grammar â€Å"error,† not realizing that breaking the convention actually improves meaning. The Classic Book of Style and Clarity 5.The Elements of Style by Strunk and White This little book has been the bible of style for over 50 years for a good reason. Be sure to read a later version that is edited by E.B. White, also, as it’s more comprehensive than William Strunk’s first edition. Best Book to Cut Bloat 6.Why Business People Speak Like Idiots by Brian Fugere Published in 2005, this book is still sadly very relevant. Business writing is drowning in jargon and meaningless buzzwords that obscure real information. It identifies four strategies to cut the bloat. hbspt.cta._relativeUrls=true;hbspt.cta.load(41482, '39de76fa-b005-4d0a-9136-a9a423513681', {}); Best to Improve Sentence Construction 7.It Was the Best of Sentences, It Was the Worst of Sentences by June Casagrande Strong sentences build strong documents. This book beautifully deconstructs clear sentences. This book is a wickedly funny, no-nonsense guide. Best Grammar Book 8.Eats, Shoots, and Leaves: The Zero Approach to Punctuation by Lynne Truss Who knew grammar and punctuation could be so funny? This best-selling book is an impassioned manifesto, complete with amusing error examples (dead sons photos may be released). Truss leans more to the prescriptivist school of grammar than the descriptivist, which matches business writing requirements. STYLE GUIDES Best for Templates and General Guides 9.The Business Writer’s Handbook by Gerald Alred, Walter Oliu, and Charles Brusaw Very useful for models and overall business writing standards. If You Have a Website or Publish Internal Information to Staff 10.The Associated Press Stylebook 2019 The definitive style guide to use if you publish anything on the web. It is regularly updated. The 2019 version is now available and has an updated section on gender considerations. Best for Current and Evolving Usage 11.Garner’s Modern English Usage, 4th Edition An invaluable desk reference for grammar and usage. It has recently been expanded and covers both American and British usage. It’s especially useful for the evolution of new words and their usage. Most Comprehensive 12.The Gregg Reference Manual, 11th Edition Traditionally, the Gregg Reference Manual has been the style guide of choice for business writers. It’s easy to navigate and depth of coverage is unmatched. The Associated Press Stylebook is now often a business’s standard guide, but Gregg has information not found in other guides. What books about business writing have helped you? Please share in comments!