Strategic Corporate Finance Analysis

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A combination of payback period, Net Present Value and IRR methods is a suitable way of measuring a project’s appropriateness. By providing a way of picking the most suitable project in consideration of the expected payback time, expected return and cost of capital. (Vinci, 2010) In that respect, the project’s choice is made by considering the three methods evaluation that can be summarized as follows. Pay back method The method entails evaluating projects in terms of the number of years that it would take for the invested capital to be paid back. In that respect, the suitable project among the list is the one with the shortest payback period. According to the method, a shorter payback period is an indication of a higher return on capital while a longer payback period denotes a lower return. Further, the method is useful in ranking projects for a business that has liquidity problems hence needs a quick repayment of its investments. However, the method has weaknesses that require it to be used in combination with other techniques like the NPV, IRR and ARR. Among the key weakness is that it ignores money’s time value, it fails to consider other cash flows beyond the capital recovery period a period during which some projects are capable of delivering significant returns, it may fail to qualify projects which have suitable return rate just on the basis of the payback period benchmark. In that respect, although the two projects falls within the benchmark expected payback period, the small wind-farm project ranks as favorable for having a shorter payback period of 6.01 years as compared to the larger project which has 6.21 years. (Dayananda, 2002) Net Present Value (NPV) Method After identification of the suitable project in terms... ... middle of paper ... ...l Statements. New York: McGraw-Hill. Kent, P., 2010. Capital budgeting evaluation: Financial analysis for today's investment projects. Colorado: Willey. Kurowski, 2011. Investment project design: a guide to financial and economic analysis with constrains. Colorado: Wiley. Schoenebeck, K. & Holtzam, M., 2012. Interpreting and Analyzing Financial Statements. 6th ed. New York: Pearsons Publishers. Strong, R., 2009. Portfolio Construction, Management and Protection. 5th ed. London: Richard D. Irwin Inc. Vinci, L., 2010. Investment Analysis and Portfolio Management. New Jersey: Prentice Hall. Weil, R. Schipper, K. & Francis, J., 2012. Financial Accounting: An introduction to concepts, methods and uses. New York: Carnegie Learning. Zaharuddin, H., 2008. A To Z Entrepreneur In Practice: Business Feasibility Study. West Java: Anugerah Prakasa.
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