Question

uestion 3 A. Briefly, critically assess the most usual methods for investment appraisal and prioritization of investment projects. Should a company take all metho account in investment decision making? ds into B. Briefly refer to the estimation of the value of a company taking also into various company financial structures. A company's value can be composed of current assets as well as of future investment plans. Describe. C.

Answer 1

1. Most usual methods of investment appraisal

NPV: It is the best measure and it shows the total value that an investment will add to the company.

IRR: It is the minimum rate of return that a company should earn on its project, But this does not consider reinvestment rate.

MIRR:- It is similar to IRR but it considers reinvestment rate.

Payback period : - The period within which the whole investment shall be recovered. This method does not consider time value of money,

Profitability index . This method is used when the available funds are limited and prioritisation   is requires.

The company should consider the most suitable method while appraising the investment making decision.

2. Estimation of value of company taking into account various company financial structures

The value of a company can be, measured using following methods:-

Market capitalisation

Earnings multiplier

Discounted cash flow

Book value

The financial structure refers to the debt equity mix. The beta has to be adjusted according to the debt.

3. Value of company = Company current assets + present value of future cash flows from investment plans

The company current assets also hold value and thus these are also needed to be added to value the company at realisable value.