Investment Criteria Analysis

1. Introduction:

Any investment decision depends upon the decision rule that is applied under circumstances. However, the decision rule itself considers following inputs.
Cash flows, Project Life, and Discounting Factor
The effectiveness of the decision rule depends on how these three factors have been properly assessed. Estimation of cash flows requires immense understanding of the project before it is implemented; particularly macro and micro view of the economy, polity and the company. Project life is very important; otherwise it will change the entire perspective of the project. So, great care is required to be observed for estimating the project life. Cost of capital is being considered as discounting factor which has undergone a change over the years. Cost of capital has different connotations in different economic philosophies. Hence, determination of cost of capital would carry greatest impact on the investment evaluation.

A number of capital budgeting techniques are used in practice. They may be grouped in the following two categories: -
I. Capital budgeting techniques under certainty; and
II. Capital budgeting techniques under uncertainty

2. Capital budgeting techniques under certainty

Capital budgeting techniques (Investment appraisal criteria) under certainty can also be divided into following two groups:
2.1 Non-Discounted Cash Flow Criteria: -
(a) Pay Back Period (PBP)
(b) Return On Investment (ROI)

2.2 Discounted Cash Flow Criteria: -
(a) Net Present Value (NPV)
(b) Internal Rate of Return (IRR)

3. Non-Discounted Cash Flow Criteria:
These are also known as traditional techniques:
3.1 Pay Back Period (PBP) :
The pay back period (PBP) is the traditional method of capital budgeting. It is the simplest an perhaps, the most widely used quantitative method for appraising capital