Investment activity

INVESTMENT PROJECT APPRAISAL

Any investment project can be assessed in different ways. The most common nowadays are UNIDO (United Nations Industrial De­velopment Organization) techniques based on payback period, net dis­counted cash flow and internal rate of return.

In the opinion of a number of scientists, net discounted cash flow appraisal, based on cash flow and discounted at a certain discount rate, is a more effective technique. Net discounted cash flow gives a wider picture of investment results.

The IRR (internal rate of return) method also considers the time value of money by discounting the cash streams. But the rate of return is not-predetermined. The IRR is based on facts which are internal to the proposal. The main idea of this method is that the internal rate of return is equal to the maximum borrowing interest rate that can be repaid over the period of the project life, if the project is financed only from borrowed funds. So the IRR is a measure of investment ef­ficiency.

All these three methods can be used separately. The choice of the method depends on the company's position, size of the investment project, the situation in financial markets. But the best idea is to use all these methods. In practice it is rather difficult but these criteria can be easily determined using modern computer equipment.

I. Answer the following questions:

1. 
   1 How can an investment project be assessed?
   
2. 
   What is the method of payback period?
   
3. 
   What are advantages of the method of net discounted cash flow?
   
4. 
   What is IRR method?
   
5. 
   What does the choice of the methods of companies depend on?
   

II. What do these abbreviations mean?

1. 
   UNIDO
   
2. 
   IRR