Financing and Marketing Management

Unit 4- Fishery Financial Management

4.3. Undiscounted Measures
Ranking by inspection
With the same investment, two projects produced the same net value of incremental production for a period, but one continues to earn longer than the other. In other instances, for the same investment total net value of incremental production may be the same, but one project has more of the flow earlier in the time sequence say in the second year itself than the other in the third year. In many cases projects can indeed be examined or rejected on the basis of inspection. A clear-cut case may be two alternative investments, one of which will cost more than the return. Such a choice project analysis must be done before selecting any projects.
Pay Back Period
Pay back period is the length of time from the beginning of the project to until the net value of the incremental production stream reaches the total amount of the capital investment. The pay back period is a basic and common means of choosing among investments in business enterprises, especially when the choice entails a high degree of risk. In fisheries projects, however it is not often used. The two important weaknesses of the payback period are
• It fails to consider earnings after the payback period. Hence payback period is an inadequate criterion for the choice between these two alternatives.
• It does not take into account the timings of the proceeds (time value of money).
Proceeds per unit outlay
Investments are sometimes ranked by the proceeds per unit out lay, which is the total net value of incremental production divided by the total amount of the investment. The criterion for proceeds per unit of outlay fails to consider timing or time value of money; money to be received in the future weighs as heavily as money in hand today.
Average annual proceeds per unit outlay method
Another criterion for investment choice is the average annual proceeds per unit of outlay, which is obviously related to proceeds per unit outlay. To calculate this measure, the total of the net value of incremental production is first divided by the number of years it will be realized and then this average of the annual proceed is divided by the original outlay for the capital items. This investment criterion has a very serious flaw. As it fails to take into consideration the length of the time of the benefit stream. It automatically introduces a serious bias towards short-lived-investment, with high cash proceeds.
Interest
Interest is the return from the fund of capital. It is the price paid for the use of credit. The interest rate is considered as an exchange price between present and future rupee. The interest rate can be of two type Simple and Compound. The interest rates are always positive because of the positive time preference for money that is the sooner money is available, the greater its value.