The Evaluation of Projects under Certainty
Investment appraisal has until recent years tended to be a very unscientific process relying primarily upon rule-of-thumb techniques based upon profit or liquidity. Probably the most common method is the accounting rate of return which is a forward-looking variant of return on capital employed. The use of return on capital employed is open to severe criticism because of such problems as defining ‘profit’ and ‘capital employed’, assessing the level of return both in terms of capital invested and of duration, and comparing the quality of return. In fact, no singledimensional measure such as return on capital can hope to provide an adequate measure of historic performance and in the same way the accounting rate of return is highly fallible as a measure for allocating capital resources between competing projects on the basis of predicted future performance.
KeywordsCash Flow Trade Credit Payback Period Capital Rationing Accounting Rate
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