GROUP 2

Identify and discuss the techniques of investment appraisal for the

small scale and medium enterprise’s(SME’S)
 TABLE OF CONTENT

 Investment appraisal
 Techniques of investment appraisal for small medium enterprises
 Non Discounted Cash- Flow
 Payback period
 Accounting Rate of Return
 Discounted Cash Flow
 Net Present Value
 Internal Rate of Return
 Profitability index
 Discounted payback period
 Conclusion
TYPES OF TECHNIQUES FOR
INVESTMENT APPRAISAL
 DISCOUNTED CASH-FLOW
 Net present value
 Internal rate of return
 Profitability index
 Discounted pay back period

NON DISCOUNTED CASH-FLOW

Payback period
Accounting rate of return
TECHNICS FOR INVESTMENT APPRAISAL
NON-DISCOUNTED CASH FLOW

Under non-discounted cash-flow future cash flows are not

discounted to arrive at their present value. The following
techniques fall under non-discounted cash flow:
PAYBACK PERIOD: the technic that states how long it takes for the project to generate sufficient cashflow
to cover the projects initial cost .for example suppose a company wants to purchase a machine costing k100000 and there are
two options it could either purchase machine A or machine B ,machine A will generate revenue of k50000,k50000 and k20000
in year 1,year 2 and year 3 respectively and machine B will generate k20000,k30000 and k50000 for year 1,year 2 and year 3
respectively as an SME the best option would be to purchase Machine A because machine A would generate sufficient
cashflow that would cover for the projects initial cost in less time as seen from the example above

 ACCOUNTING RATE OF RETURN: this is basically an accounting technique that measures the
profit expected from an investment.
 accounting rate of return is expressed as a percentage%.
 The formula and example for accounting rate of return(ARR) is shown below
DISCOUNTED CASH-FLOW TECHNIQUES

 Discounted cash-flow techniques calculate the present value of cash-flows to

be received in the future .the following are classified under discounted cash-
flow techniques:
 Net present value
 Internal rate of return
 Profitability index
 Discounted pay back period
 Net present value: this is the value of discounted future inflows and outflows
. related the project. This method lays out the importance of money and it is in line with the
company’s objective to maximize share holders wealth.

 Internal rate of return: the discounting rate at which a company will neither
make a loss nor a profit. This rate can also be called the yield on investment and the marginal
efficiency of capital

 Profitability index: it determines how much you will earn per dollar of
investment. Profitability index can be calculated by dividing the present value of future cash
flows over the initial investment.
 Profitability index =present value of future cash flows/initial investment.

 Discounted pay back period: this is the same a payback

method .the only difference is in discounting pay back method the pay back period is discounted
on the basic of discounted future cash flows.in contrast the payback method is calculated on the
basis of future cash flows.
 CONCLUSION

 In real life scenarios, since the investment in any project will be huge and
will have a long-term effect, an organization uses a combination of various
techniques of capital budgeting like NPV, IRR and payback period to select
the best project.
Student id