(125)---INVESTMENT APPRAISAL CRITERIA

Investment Appraisal Criteria

A number of investment appraisal criteria or capital budgeting techniques are in use of practice. They may be grouped in the following two categories:

1. Discounted cash flow criteria
   • Net present value (NPV)
   • Internal rate of return (IRR)
   • Profitability index (PI)
2. Non discounted cash flow criteria
   • Payback period
   • Accounting rate of return
   • Discounted payback period

Discounted payback is a variation of the payback method. It involves discounted cash flows, but it is not a true measure of investment profitability. We will show in our following posts the net present value (NPV) criterion is the most valid technique of evaluating an investment project. It is consistent with the objective of maximizing the shareholders wealth.