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Complete 8 pages APA formatted article: The Approaches a Non-Financial Company Should Take in Managing Risk Inherent in a New Project.
Complete 8 pages APA formatted article: The Approaches a Non-Financial Company Should Take in Managing Risk Inherent in a New Project. The three main investment appraisal techniques are the payback method, accounting rate of return method and the net present value method(Rohrch,2007). According to the payback method, there will be a target payback for a company, and so it would reject a capital project unless its payback period was less than that target payback period. The payback period is defined as the time required for the capital for the cash inflows from a capital investment project to equal the cash outflows.
P = I/ CI----------(1), where P is the payback period, I is the investment required and CI is the net annual cash inflow.
According to the accounting rate of return method, a project appraisal involves estimating the accounting rate of return that a project should yield. If it exceeds a target rate of return then the project is acceptable. The Accounting Rate of Return (ARR) expresses the average accounting profit as a percentage of the capital outlay. Its main advantages are that it can be easily calculated from financial statements and considers the entire project life. However, the main limitations associated with this method are that it does not consider the project timing, relative measure without considering the investment size, based on accounting projects instead of cash flows, ignorance of the length of the project and the time value of money(Baddeley,2006).
ARR = (AP/ O)*100------- (2), where AP is the average accounting profit and O is the capital outlay.
According to the net present value method, the decision rule is to accept a project with a positive Net Present Value (NPV). The net present value of a project is the difference between its projected discounted cash inflows and discounted cash outflows.
NPV= PCI –PCO------(3), where PCI is the projected discounted cash inflows and PCO is the projected discounted cash outflows.
Its main advantages are that it considers time value of money, all relevant cash flows incorporate risk, direct measure of wealth maximization and clear decisions.  .Though the NPV method is considered to be theoretically superior over other methods generally, . it has been criticized with regards to the difficulties in practical sage-like complexity, errors and assumptions like shareholder value maximization.
