Florence Regarding Investment Appraisal Essay Example | Topics and Well Written Essays - 1750 words

Florence Regarding Investment Appraisal - Essay Example Capital budgeting is primarily undertaken when investment outlay is done for a long period. In the context of this paper, the investment will be done in heavy machinery and the project period is 5 years. Payback period denotes the time period that is absorbed by the project for recovering the total cost of the project. Payback may not be the primary technique but it is an important technique that determines whether a firm should undertake a particular project. The criterion is that when projects are compared on the basis of payback period, a project with shorter payback period is selected (Sangster, 1993; Cooper, Cornick and Redmon, 2011). The calculated payback period for each project is as follows: It was calculated that project A required the least amount of time followed by project B and project C respectively. In other words, Project B requires 0.52 years or about 6 months more than project A. From the perspective of payback period, project A can be recommended over the other pr ojects as it takes the shortest amount of time to recoup the initial outlay (Sangster, 1993). Accounting rate of return is often considered as the true measure of profitability with respect to a project in capital budgeting as it not only take into account the net cash inflow but also focuses on expected net earnings from each project with respect to the fund invested initially. This technique works on the notion that earnings instead of generally cash flow are better measure of success of an investment. A project with higher accounting rate of return is generally considered as the superior choice (Kida, Moreno and Smith, 2001). The calculated accounting rate of return of each project is as follows: It is important to discuss the reason for using incremental revenue prior analyzing the outcome.