Techniques Of A Project Evaluation

Question 1

Project evaluation criteria

Answer 1

• to estimate the cost and benefits of a project
• to calculate and verify the cost of capital
• to compute the criteria and judge whether or not the project is acceptable

Question 2

Discounting criterion

Answer 2

• net present value
• benefit/ cost ratio
• internal rate of return
• profitability index

Question 3

Non discounting criterion

Answer 3

• payback period

- accounting rate of return

Question 4

Accounting rate of return

Answer 4

Is a financial ratio used in capital budgeting, it calculates the return generated from net income of the proposed capital investment. It is a percentage return and it is calculated as net profit(pie)/ capital employed (k)

Question 5

Payback period

Answer 5

It is the time required to recoup the funds expended in an investment or to reach the breakdown point
It is also the period of time it takes for an investment project to generate net incremental cash that will be sufficient to recover its initial capital outlay

Question 6

Net present value

Answer 6

It is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. It is used in capital budgeting and investment planning to analyze the profitability of a project

Npv = (Ct/(1+r)^t)- Kt

Question 7

Internal rate of return

Answer 7

It is the rate of discount that equated Npv to zero. These are the criteria:

• Accept the IRR if it exceeds the market rate of interest
• In terms of ranking accept the alternative with the highest IRR