Question

Discuss the various methods used to

evaluate capital investment proposals?

(Hint: Average rate of return, cash

payback period, net present value, and internal rate of return. For the more

adventurous, include

-

MIRR

—

Modified

Internal Rate of Return.

o

Requirements:

250 words minimum initial post

No Plagiarism!! It will be Checked!! Answer all parts of the Question!! Must be 250 words or more!

Answer 1

During Capital investment a investor always worries for the money which he will invest and how much he will get back from such investment. Since capital investment is a high risk investment which comes with ownership, so investor always does a deep analysis and evaluation in the investment.

There are various method which helps in evaluation such as,

Average rate of return - Average rate of return means the overall return throughout the period which is calculated on yearly percentage basis. It helps the investor to identify what the investment in project will give him in return and he can compare the return with his expectations.

Payback period - payback period means the period or number of years in which the project will give back it's investment to investor. Some investors need their return in a very less period and some invest for a long time and so the investor can judge payback period for investment return and take decision.

Net present value - It is the most popular method of investment decision analysis. In this Investor uses time value of money to bring the inflows in today's value and reduces it with Investment amount. If the NPV is positive investor can think for investment but if it is negetive investor will never invest.

Internal rate of return - IRR is again a most popular method in which investor identify the project internal return and them compare the return with the investor expected return. If IRR is higher the expectations investor can think of investment, but if IRR is lower then investor will not invest.

Modified Internal rate of return - It is same concept as IRR the only difference is that in MIRR we assume that all the inflows are reinvested in the project itself and then we find out the internal return to compare.