Discuss and evaluate the various methods available for long term Essay

Discuss and evaluate the various methods available for long term investment appraisal - Essay Example 33). It is essential to conduct any investment proposal (long-term or short-term) appraisal in order to ensure funds invested would accrue maximum gains in future. Since financial resources tend to be limited (in majority of the cases), a business firm, instead of choosing several proposals, must evaluate and select only the ones that are most appropriate for investing purposes (Sullivan and Steven, 2003). Therefore, it can be assumed that there would be certain techniques followed specifically for appraising proposals for investment. In this context, the paper will now examine various methods available for long-term investment appraisal (capital budgeting). Investment appraisal comprises of analysing a firm’s financial plans, its investments, as well as predicting the firm’s expenditure in a certain proposed project (Levy, 2002). Long-term investment appraisal in small firms often takes into account the possibility of future growth, new enterprises, and a future move into a completely new arena (ibid). Factors for long-term investment appraisal are chosen keeping the requirements of company policymakers and stakeholders in mind, and focus on long-term and sustainable growth of the firm (as opposed to short-term profits). Various methods are used for long-term investment appraisal of a firm. These are: Net present value (NPV): This appraisal method calculates the cash flows (deficit or excess), once the customary obligations are completed (Khan, 1993). All forms of long-term or short-term investment appraisals aim at deriving a positive figure for the firm’s NPV. The process calculates the total cash flow of a firm (incoming and outgoing) at a certain specific time (t), at a discount rate (i) at that particular time, which translates to: t-funds invested initially, making NPV inversely proportional to discount rates (Pike and Neale, 2008, p. 123-124). Therefore, NPVs are reduced with rise in discount values (i), while high interest rates