A company requires nearly accurate evaluation techniques in order to estimate the viability of a particular business decision. This is necessary since organizations undertake many ventures that demand an investment of massive funds. Evaluation techniques when employed assist a company in judging financial pitfalls or possible market risks that are likely to occur in the recent future.
Students willing to establish a glorious career in the field of accounting or bookkeeping and finances must master these techniques. With sufficient help from experienced teachers, they can learn these vital subject matters. In addition to this, self-study is equally important and will help them check their progress with the subject. Students can gather evaluation techniques homework answers with research from different textbooks as well as informative sites available on the internet.
Evaluation techniques factors associated with it
Capital budgeting means making business decisions that are meant for returns to be observed after a long period of time. It is a primary area of business which is highly affected by evaluation methods. It is a process employed by a company to calculate probable expenditures and financial outlay that is considerable in amount.
Capital budgeting involves several risks-
- Since the returns are subject to time, the market risks increase eventually. This why stringent and thorough planning is required to undergo this enormous amount of investment.
- A huge amount of funds outflow is necessary and once the decision is made it cannot be reversed or the money drained cannot be withdrawn.
Since capital budgeting is a major area of application of evaluation techniques it is mandatory for students have complete knowledge about it. They submit their evaluation techniques homework answers within specified time with proper research and help from appropriate quarters.
Various evaluation techniques are adopted for estimating capital expenditure. Each serves different purposes. They are-
- The method of Payback period–
Payback period is the span when a project which is invested on starts to recover the money. This is the simplest method opted for evaluation of the returns expected from a venture. This method gives maximum importance to the cash influx, the return of funds from the project and the financial outlay that was made initially for that particular project. Payback technique helps to understand the practicality of a project and whether it is at all profitable.
It assists in determining the nature of a project a company may try to put its money on and by following simple rules this decision can be easily taken and the impending market risks can be avoided.
Payback method can be formulated as-
Payback Period = Investment Made / Yearly Cash Influx
- The method of accounting rate of return (ARR) –
The main purpose of adopting this method is to avoid the disadvantages of the above-mentioned payback method. The percentage of revenue earned by a particular venture is regarded as the accounting rate of return.
Before the commencement of a project, the management team of the firm investing on it determines an approximated rate of return that might be obtained from it. Now if the ARR is more than the projected rate then that venture is considered feasible else it is discarded.
This method takes into consideration the entire financial prospects of a project and makes the decision of whether or not to opt for it easier for the management.
It can be formulated as-
Accounting Rate of Return = average inflow of cash / average outflow of cash(investment)
- The method of Discounted Cash Flow–
This technique ideally takes into consideration the factor of interest and the projected return after the completion of the payback period. It is exploited to derive the cash obtained and the outlay through the longevity of a particular asset. Following this, a discounting factor is deducted from both the cash obtained and the outlay and eventually they are set in comparison.
- NPV or Net Present Value method–
This is the most frequently recruited evaluation techniques for capital expenditure decisions. It compares the present cash influx with the initial investment made on the project. If their difference is found to be positive then it is a desirable option else this proposal is tanked.
This method takes into account the time value of cash and abides the principle of generating highest benefits for the employer.
NPV can be calculated by the following equations-
NPV = PVP – PVC
PVB: Present Value of the Profits
PVC: Present Value of the Costs
Solving numerical on these topics may get a bit challenging for students owing the complex questioning patterns. They may fail to distinguish between two different methods since most of them are inter-related. So they can consider taking help for deriving Evaluation Techniques Homework Answers from online educational portals at all times.
- The method of Internal Rate of Return (IRR)–
To put it simply, IRR is the rate by which the calculated Net Present Value of an investment proposal ultimately amounts to be nil or zero. At this condition, the discounted cash obtained is numerically equal to the discounted cash outlay. IRR also takes into account the time valuation of cash. This technique mainly focuses on deducing a rate that would eventually amount in obtaining the initial investment made.
- The technique of Profitability Index–
Profitability index (PI) represents the ratio of the current valuation of the probable monetary profits at a rate of return of the preliminary cash output of the initially poured finances.
Profitability index can be calculated from the given equation,
PI = Present value of cash influx / early investment
If the profitability index so obtained is found to be greater than one then the proposal is accepted.
With some amount of help from teachers or mentors, students can easily imbibe these crucial concepts of evaluation techniques. They are always advised to gather all the assistance accessible for deducing evaluation techniques homework answers and tricky problems. Guidance will also provide some new ideas to apply in project works and class assignments.
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