Financial evaluation of a project is analysis of a project for checking whether project is profitable or not before taking project in hand. We also review the project by investigating its cost, risk and return. If we have lots of alternatives projects, then we select best project on the basis of financial evaluation. In simple words, we uses following tools for financial evaluating of a project.
1. Evaluate the Cost of Project
First thing which we see before take the any project from financial point of view is to evaluate the cost of project. Whether cost of project is good according to its quality or not?
2. Time Value of Investment in Money
Time value of investment in money is the importance factor which affects the decisions of financial evaluation of any capital investment because we check the profitability of project according to time. Today earned one rupee from any project is better than one rupee earned after one year because we can get interest one rupee which has earned today.
NPV is also good tool of financial evaluation. If we have two project and we have to choose any one best project, then we will check NPV of each project. We will accept that project whose NPV will higher. NPV means net present value. It is excess of present value of cash inflows over present value of cash outflow.
IRR is internal rate of return. It is that rate where the total present value of cash inflow is equal to the present value of cash outflow. So, if any project gives use this earning rate, we will accept that project.
5. Pay back period
Pay back period is not non-discounting technique of financial evaluation. In payback period, we find the total time in which our project will give use profit equal to our initial cost. If payback period of one project is less that payback period of second project, then we will select first project instead of accepting second project because less payback period will be better than longer payback period for financial evaluating of any project.
6. Risk Evaluating
We also analyze different risks relating to financial evaluation of any project. Risk may be liquidity, solvency or interest or any other. After this, we see whether we have ability to manage these risks, if not, then, we leave that project for projecting our business.
Related : Lecture of Prof. Arun Kanda on Financial Evaluation