Financial evaluation of a project is the analysis of a project for verifying whether project is gainful or not before taking project in hand. We too review the project by investigating its risk, cost, and return. When we have lots of alternatives projects, then we choose best project on the basis of financial evaluation. In simple words, we employ subsequent tools for financial evaluation of project.
A. Assess the Cost of Project:
First thing that we see previous to take any project from financial point of view is to assess the cost of project. Whether cost of project is excellent according to its quality or not?
B. Time value of investment in money:
Time value of investment in money is the significant factor that affects the decisions of financial evaluation of any capital investment since we check the profitability of project according to time. Nowadays earned one rupee from any project is better than one rupee earned after one year since we can get interest one rupee that has earned now.
NPV is as well very good tool of financial evaluation. Whenever we have two project and we have to select any one finest project, then we will verify NPV of each project. We will admit that project whose NPV will high. NPV means total present value. It is surplus of present value of cash inflows over present value of the cash outflow.
IRR is the internal rate of return. This is that rate where the net present value of cash inflow is equivalent to the present value of the cash outflow. Therefore, when any project gives utilization of this earning rate, we accept that project.
E. Payback period:
This period is not non-discounting method of financial evaluation. In payback period, we get the total time in which our project will provide use profit equivalent to our initial cost. When payback period of one project is less than payback period of second project, then we will choose first project rather than accepting second project since less payback period will be better than longer reimbursement period for financially evaluating any project.
F. Risk Evaluating:
We too analyze different risks associating to financial evaluation of any project. Risk might be liquidity, solvency or interest or any other. Subsequent to this, we see whether we have capability to manage such risks, if not, then, we depart that project for projecting our business.
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