Thursday, April 8, 2010

Screening options for acceptability

Screening options for acceptability
The criteria used are :
  1. Analyzing return :It involves profitability analysis.Expected return from specific strategic options are assessed.The approaches used for analyzing returns are :
a.Profitability analysis :It assesses financial return to investments.The tools used for profitability analysis are:
  • Return on capital employed :It exmines the relationship between net profit after tax and capital employed.
  • Pay back period :It is used for options related to capital project.It indicates how many years will be needed for cash benefits to pay for the original investment.It is the time at which the cumulative net cash follows becomes zero.
  • Discounted cash flow:It considers time value of money.Forecasted net cash follows from an option are discounted at a specific rate.The method can be :
  1. Internal rate of return :It used trial and error method to find out the rate of discounted.
  2. Discounted cash flow :It considers time value of cash flow for total life of project.
b.Cost/benefit analysis :It assesses the overall economic impact of the strategic option.All the costs and benefits of a specifics option are forecasted.Cost/benefit ratio is calculated.

c.Shareholder value analysis :It assesses the impact of strategic option in generating shareholder value.The shareholder value is total shareholder returns.

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