Fundamentals of Financial Management, Third Edition

5.3 PROJECT EVALUATION CRITERIA

After the cash flow is estimated in respect of a proposal/project, it is put to evaluation criteria in order to determine whether the proposal/project is to be accepted. Broadly, there are two types of evaluation criteria: First, where cash flow is discounted to the present value and, second, where it is not discounted. The commonly used discounting techniques are:

1. Net present value (NPV) method;
2. Discounted benefit-cost ratio method;
3. Internal rate of return (IRR) method;
4. Modified internal rate of return (MIRR) method.

The commonly used non-discounting techniques are:

1. Pay-back period method;
2. Accounting rate of return.

It is reported that 10-20 per cent of the large US multinational firms use the accounting ...