Companies will use investment appraisals in order to

evaluate the attractiveness of an investment. When considering whether an

investment will achieve a targeting yield, net present value will show the

estimate of the present value of cash flows. From the figures shown in the

table, we gather that the NPV for the project is £160,415; this positive NPV

indicates that the estimated earnings generated by the investment will surpass

the cost of the project. Therefore the project will be profitable and can be recommended

on financial grounds.

When assessing the viability and attractiveness of a

project, businesses will also use the internal rate of return. This method is

used to calculate the rate of return on the initial project. In order to

calculate IRR the NPV of all cash flows from the project would have to equal to

zero, IRR will be presented as a percentage return the company is expected to

make from the project. The internal rate of return for the project is 17.37%,

which is greater than the discount rate used, this shows that the project is

desirable as the IRR exceeds the companies required rate of return. IRR allows

projects to be ranked based on overall rate of return, with investments with

the highest IRR favoured.

Both the Internal rate of return and the Net present value

are vital when assessing the outcome of a new project. NPV takes into account the idea that a

currency will be worth more in the future, therefore allowing investors to know

whether an investment will create value. The IRR method presents an easy to

measure percentage, which is simple to interpret and understand. Internal rate

of Return also has disadvantages such as at time having conflicting answers

when compared to NPV. However, both methods are heavily dependent on

estimations and assumptions, which will mean there is substantial room for

error as the project might not have return as estimated.