Page 98 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Net Present Value (NPV)

• Projects with positive net present values should be accepted.

• Where projects are independent all projects should be accepted if they
have positive NPV’s.

• Where 2 projects are mutually exclusive (only one can be accepted) the one
with the higher net present value is preferred.

• When comparing two different investments make sure they are comparable
in terms of:

- The initial cost (see slide on capital rationing), and
- project lifespan.

• When comparing alternative projects with different lives an annual
equivalent needs to be calculated.
PV = NPV calculated

n = number of years
i = cost of capital
COMPUTE PMT

• The project with the higher annual equivalent is accepted.

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