Financial Justification of Capital Projects

Justification of capital asset expenditures can be attempted using numerous approaches. Obtaining meaningful results is essential if a company is to invest wisely in the future. This paper presents overviews of four industry accepted techniques: return on investment (ROI), accountant rate of return (ARR), net present value (NPV), and internal rate of return (IRR). The advantages, disadvantages and technique limitations are discussed. Risk is associated with investment opportunities and must be considered in evaluations. Approaches of sensitivity and risk analysis are discussed.