Page 108 - DBP5043

PROJECT VALUATION TECHNIQUES

The selection of projects:

Condition of mutual exclusion - States can only choose one project. This
may be due to companies experiencing capital constraints, time or labour.

The situation is not independent - Companies can select multiple projects as
long as many of those projects that meet the criteria established by the
company

The techniques can be used for capital budgeting are:

a) Payback Period

b) the net present value (NPV)

c) Profitability Index (PI)

d) Internal Rate of Return (IRR)

a) PAYBACK PERIOD

One of the most popular technique is the simplest technique. Payback
Period is a reference to a number of years needed to recover the money
invested during the early stages of investment (Io). Payback Period called
the number of years.

Decision criteria

It is the number of year needed for a project to return its initial investment.
The earlier the payback is better

The selection criteria for a project:

A project will:

Selected : Payback Period < period required by the company

Rejected : Payback Period > period required by the company