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How To Appraise A Project
How To Appraise A Project
There are four types of measures are commonly used to evaluate the performance of
company subunits.
1. RETURN ON INVESTMENT
2. RESIDUAL INCOME
3. ECONOMIC VALUE ADDED
4. RETURN ON SALES
Return on investment
ROI is an accounting measure of income divided by an accounting measure of investment
ROI = income/investment
ROI is most popular approach to measure performance for two reasons, it blends all the
ingredients of profitability – revenues, cost, and investment – into a single percentage and
it can be compared with the rate of return on opportunities inside and outside of the
company.
RESIDUAL INCOME.
Some companies favor the RI measure because managers will concentrate on maximizing
an absolute amount, such as dollar of RI rather than % or investment.
Economic value assed is a specific type of residual income calculation that has recently
attracted considerable attention. EVA equals after-tax operating income – the after tax
weighted average cost of capital multiplied by total assets minus current liabilities.
RETURN ON SALES
The income to revenues ration often called ROS is frequently used financial performance
measure. ROS is one component of ROI in the Dupont method of profitability analysis
Payback Period
How long will it take for the project to generate enough cash to pay for itself?
Discounted Payback
Discounts the cash flows at the firm’s required rate of return.
Payback period is calculated using these discounted net cash flows.
Problems:
Cutoffs are still subjective.
Still does not examine all cash flows.
Other Methods
Submitted By:
Muntazir Abbas