A Critical Review of Project Analysis Techniques

Abstract

ABSTRACT Present value and discounted cash flow (also called internal rate of return) have been used extensively in project economic analysis. Both are very popular and often used together to help make decisions but neither are without problems. The present value technique employs a minimum rate of return which is frequently difficult to define. It also lacks a good comparison and definition once a number is calculated. On the other hand, the discounted cash flow does not require a minimum rate of return in its calculation. However, it has been surrounded by controversy as to whether reinvestment of incomes is implied in its calculation and it is difficult to calculate and interpret for certain cash flow streams. When income precedes cost in a cash flow stream, the discounted cash flow calculation may yield two or more values. For this type of cash flow stream, there are also questions concerning the meaning of present value. The growth rate of return (also called external rate of return) is a technique that eliminates some of the problems mentioned above but it has not been widely accepted in industry. Payout and other techniques are also not without their problems. This chapter will review the popular project analysis techniques and discuss the future of profitability analysis.