A CRITIQUE OF THE TECHNIQUE FOR THE ASSESSMENT OF THE COMMERCIAL PROFITABILITY OF AN INVESTMENT

AUTHOR: AKUJIOBI, LINUS EZEWUNWA  MSc

FEDERAL UNIVERSITY OF TECHNOLOGY OWERRI, IMO STATE, NIGERIA

The setting up of an investment requires proper evaluation, with a view to determining its viability. Such an exercise involves the use of some techniques or models. The major ones in use include the non discounting models like visual selection, capital recovery period and accounting rate of return and discounting ones like net present value, internal rate of return, profitability index and time adjusted discounting method. However, these techniques are associated with one form of problem or the other. For instance, the non-discounting models virtually do not take into consideration the time value of money. On the other hand, the discounting models though very useful, have their own limitations. While internal rate of return (IRR) has limitations such as burdensome computation, re-investment assumption and possibility of multiple IRRs net present value (NPV) does not explicitly consider constraints other than profitability  ranking investments. Even time adjusted discounting method that came into existence to correct these problems is also not fool proof. Therefore this work will critically study the major techniques for the assessment of the commercial profitability of investments. This involves identifying the major limitations and advantages of the techniques and determining whether they give different, incorrect and contradictory rankings to identical set  of investments, among others. This study is carried out based primarily on secondary data collected from investment proposals of some companies. Using such methods as discounting, the data collected are analysed. The research has been able to find out and confirm the limitations of both the discounting and non-discounting methods. The discounting methods, though an improvement over the non-discounting ones, are also associated with some serious shortcomings. Also, e earlier belief that the techniques give contradictory rankings is disproved. The rankings based on the techniques can also give identical results. It is therefore recommended among others, that proper evaluation be carried out y a competent analyst before any investment is embarked upon. Also, as many of the techniques as possible should be applied before a conclusion is drawn. Furthermore, qualitative assessment should also be undertaken before a decision is taken.

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