Explain Investment Appraisal Techniques Used by a Project Manager

Question 1

Investment Appraisal

Answer 1

• A collection of techniques used to identify the attractiveness of an investment
• Enable the financial viability of the projects to be measure both on a standalone basis and in comparison with other projects competing for funds
• Process should confirm why the forecast cost and time will be worth the investment, and justify the project based upon the estimated costs and the value of projected benefits

Question 2

Investment Analysis Techniques - Net Present Value (NPV)

Answer 2

• The aggregate of future net cash glows discounted back to a common base date, usually the present
• A major draw back of the payback period method is that is assumes the value or ‘spending power’ of money remains constant over time…… that is £10 this year has the same spending value as £10 in say 7 years,. We know the spending power of money does vary and usually reduces over time and this can be factored in by app

Question 3

Investment Analysis Techniques - Inter Rate of Return (IRR)

Answer 3

• The discount rate at which the Net Present Value of future cash flows is Zero
• This technique expresses the attractiveness of an investment as a percentage rate
• It determines the Discount Rate at which the NPV is zero
• Discount rate at which the present value of all future cash flow is equal to the initial investment
• It relies on there being both cost and income in the investment appraisal