Financial management Essay Example | Topics and Well Written Essays - 250 words - 3

Financial management - Essay Example Following are some techniques that are used in investment appraisal of the project. The basic advantage of this technique is that ROCE is much simpler than other methods and can links with other accounts easily. But seeing as both side of coin ROCE also have some disadvantages like ROCE is not an absolute measure of the project life and timing of cash flow is not considered in this method. Net Present value (NPV): NPV simply means that what is the value of future flows in current terms. It is considered to be a superior to most of other methods. It consider the time value of money and an absolute measure of return but it also have some disadvantages like it is difficult to calculate and difficult to explain to managers. Internal rate of return (IRR): IRR represent the discount rate at which NPV of an investment is Zero. It represents the breakeven cost of capital. As other techniques IRR has also some advantages like it consider the time value of money and use cash flows rather than profits. The main benefit of the IRR is that it is in percentage therefore easily understood by the managers. But as other methods IRR has also some disadvantages like it is not absolute measure of probability and also complicated to calculate. The cost of capital is the rate of return that the enterprise must pay to satisfy the providers of funds, and if reflect the riskiness of providing funds. Valuation of cost of capital is depend upon is based upon these certain