Capital investment decisions aim includes allotting the capital investment funds of the firm in the most effective manner to make sure that the returns are the best possible returns. Researchers indicated that there are basically four methods that have been used in practice which are Payback Period (PP),Internal Rate of Return (IRR),Accounting Rate of Return (ARR) and Net Present value (NPV) used by firms to evaluate investment opportunities throughout the world (Atrill & Mclaney, 2008). The Net Present Value (NPV) and Internal Rate of Return (IRR) methods are considered to be discounted cash flow (DCF) methods. The Payback Period (PB) and Average Accounting Rate of Return (ARR) methods are ...view middle of the document...
The ARR is considered as a substitute to the IRR in the various contexts where measures or comparisons involving the IRR are deemed relevant (Feenstra, Huijgen, and Wang, 2000).
According to the theory (Atrill and Mclaney, 2008 and Colin, 2008), NPV method is considered to be the most superior technique and it’s most preferred to evaluate investments. The main reason behind this is that it takes account each of the following characteristics like relevant cash flows, timing of cash flows and the objectives of business (Atrill and Mclaney, 2004). Colin (2008) cited that it is easy to compute than IRR and also the ultimate goal of a firm is to maximise shareholder’s wealth, NPV leads to correct decisions compared to IRR.
As a matter of policy, Scheepers (2003), who is the Project Manager, Absa Group IT said investment proposals are usually subjected to two financial tests, “payback” and “internal rate of return (IRR)”. And, the firms generally preferred IRR for evaluating projects but NPV is superior compared to In fact, from a pure theoretical point of view the NPV is considered to be the most accurate technique to evaluate projects. Yet, it is also the most sophisticated of the four, followed by the IRR method. Both non-DCF methods are considered to be less accurate, of which the PB method is the least sophisticated (Hermes, Smid, and Yao, 2006).
5) Must Finance and Strategy Clash?
By Patrick Barwise, Paul R. Marsh, and Robin Wensley
Marketing and finance often disagree about long-term strategic investments. When project analysis is done correctly, however, an investment that makes good marketing sense will also provide competitive advantage (September-October 1989). Simply put, marketing and finance are complementary to each other when the analysis is right. “Must Finance and Strategy Clash?” has arose two questions which are, does the product or service have enough value to enough customers to support prices and volumes that exceed the cost of supplying it, including the opportunity cost of capital, and does the company have enough sources of sustainable competitive advantage to exploit, develop, and defend the opportunity. The first question is central to post-war marketing and the ‘marketing concept’. While for the second question reflects the marketing that emphasis on competitive strategy.
The first question indicates that, strategic investment decision making will influence what the organisation does where it does it and how it does it. Means that what the organisation set of product, service and activities characteristics that defines its current business operation on depending upon the strength of organisation resources, capital and access to the business markets and how the organisation set of business operating processes and activities are to be planned by taking in view the organisation resources and objectives.
Finance theory assumes that a project will be evaluated against its base case that is...