Discuss Net Present Value (NPV) Payback has certain advantages, but disadvantages for long term project appraisal. Discuss.
Date Submitted: 02/02/2002 03:51:18
Category: / Business & Economy / Accounting
Length: 5 pages (1299 words)
Category: / Business & Economy / Accounting
Length: 5 pages (1299 words)
INVESTMENT APPRAISAL
Characteristically, a decision to invest in a capital project involves a largely irreversible commitment of resources that is generally subject to a significant degree of risk. Such decisions have far-reaching effects on a company's profitability and flexibility over the long term, thus requiring that they be part of a carefully developed strategy that is based on reliable appraisal and forecasting procedures.
In order to handle these decisions, firms have to make an assessment …
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…cash flow.
CONCLUSION
Despite the disadvantage discussed above, NPV is the single most valuable of the various methods of capital investment appraisal and the one that should be used as the basis of decision making in this area.
It is probably best to see payback as a measure of liquidity than profitability. On that basis the payback method should only be a preliminary screening device, which is inappropriate as a basis for sophisticated investment decisions.
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