Sheet5Different methods of project evaluation include:

1Net present value (NPV).Difference between the PV of the net cash flows (NCF) from an investment, discounted at the required rate of return, and the initial investment outlay.Measuring a projects net cash flows:Forecast expected net profit from project. Estimate net cash flows directly.Evaluation of NPV

NPV method is consistent with the companys objective of maximising shareholders wealth.A project with a positive NPV will leave the company better off than before the project and, other things being equal, the market value of the companys shares should increase.Decision rule for NPV method:Accept a project if its NPV is positive when the projects NCFs are discounted at the required rate of return.2Internal rate of return (IRR).The internal rate of return (IRR) is the discount rate that equates the PV of a projects net cash flows with its initial cash outlay. IRR is the discount rate (or rate of return) at which the net present value is zero.The IRR is compared to the required rate of return (k).If IRR > k, the project should be accepted3Benefit-cost ratio (profitability index).The profitability index is calculated by dividing the present value of the future net cash flows by the initial cash outlay:Decision rule:Accept if benefitcost ratio > 1Reject if benefitcost ratio < 14Payback period (PP).The time it takes for the initial cash outlay on a project to be recovered from the projects after-tax net cash flows.Decision:Compare payback to some maximum acceptable payback period.What length of time represents the correct payback period as a standard against which to measure the acceptability of a particular project?