Evaluative Tools and Capital Investment

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Evaluative Tools and Capital Investment

Introduction

The businesses are supposed to be run for the only purpose of making profits. The organizations have to evaluate the projects in term of financial performance before undertaking the projects. The researchers and theorist have discovered many different ways to evaluate the projects. This is a rigor procedure because it is not easy to determine that which project will bring profits and which will end up in losses. There are various types of tools that organizations use in order to evaluate the projects. These tools include calculating Net Present Value (NPV), payback period, Internal Rate of Return (IRR), breakeven analysis and Modified Internal Rate of Return (MIRR). These tools evaluate the projects cash flows in different ways and each tool has its own advantages and limitations. It is very important that these tools should be considered while preparing a set of capital investment guidelines for evaluating planned projects in terms of financial performance. The users should have detail knowledge and good understanding of the outcome of these tools and the users must know how to interpret the outcome of these tools.

Discussion

Guidelines for Evaluation

Size of Cash Flow

The first guideline for evaluating the projects on the basis of their financial performance is the size of the cash flow. The size of both cash inflow and outflow are very important to consider when evaluating projects. If the project is asking for big size cash outflows as initial investments and then it offers small size of cash flow but for long period of time then there is a need of finding the net cash inflow or outflow. If project offers relatively higher size of cash inflow as compared to cash outflow then the projects seems as an attracting opportunity.

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