MTH 105

INVESTMENT APPRAISALINVESTMENT APPRAISAL:A technique or method used to evaluate or assess

the profitability of an investment project.

Investment Decisions:- Firms: investments in long term assets such as

property, plant, equipment, etc

- Individuals

Investment Appraisal

Decisions should be made carefully because:-Investment require significant cash outflows-Investments are made for a long term

Investment AppraisalNet Present Value Method (NPV):- Uses discounted cash flows to evaluate

investment projects.

NPV METHODFind the NPV of project 1 given the following:I : initial investment

r : required rate of return

A, B, C, . . . Z : projected cash inflows

n : no. of years

NPV METHOD Year Project A 1 A 2 B 3 C . . . . . . n Z

NPV METHODSolution:Find the present value of all cash inflows: (Discount all

cash-inflows back to year zero and add).

NPV = Present value of – Present value of cash inflows cash outflows

NPV METHODAccept the project if:NPV ˃ 0 (positive NPV)

NPV METHODExample:Find the NPV of a hostel investment project given the data

below:- Is this project worth pursuing?

Initial investment ( I ) = GH 5,000

Required rate of return ( r ) = 10%

NPV METHOD Year Hostel 1 800 2 900 3 1200 4 1400 5 1600 6 1300 7 1100

NPV METHODExample 2You want to invest in either a Hostel project or a Hotel

project. Given the following data, which would you choose?

I = GH 5,000r = 10%

NPV METHOD Year Hostel project Hotel project 1 800 1100 2 900 1100 3 1200 1100 4 1400 1100 5 1600 1100 6 1300 1100 7 1100 1100

NPV METHODTwo or more investment projects:- Choose the one with the highest NPV