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Why might a business prefer one appraisal method over another for specific projects?

A business might prefer one appraisal method over another due to factors like cost, complexity, risk, and the nature of the project.

Businesses often have to choose between different project appraisal methods based on a variety of factors. One of the most significant factors is the cost involved in implementing the appraisal method. Some methods, like the Net Present Value (NPV) or Internal Rate of Return (IRR), require complex calculations and may need the expertise of financial analysts, which can be costly. On the other hand, methods like the Payback Period or Accounting Rate of Return (ARR) are simpler and less expensive to implement.

The complexity of the project is another factor that can influence the choice of appraisal method. For large, complex projects with multiple cash flows over a long period, methods like NPV or IRR are more suitable as they take into account the time value of money and provide a more accurate assessment of the project's profitability. However, for smaller, simpler projects, the Payback Period or ARR might be sufficient.

Risk is another important consideration. Some projects are riskier than others and this risk needs to be factored into the appraisal. Methods like NPV or IRR are better at handling risk as they discount future cash flows, effectively reducing their value and thus accounting for the risk. However, these methods can be complex and require a good understanding of financial concepts.

The nature of the project can also influence the choice of appraisal method. For example, if a project is expected to generate significant intangible benefits, like improved brand image or customer satisfaction, traditional financial appraisal methods may not be suitable. In such cases, businesses might prefer qualitative appraisal methods that can better capture these intangible benefits.

In conclusion, the choice of project appraisal method depends on a variety of factors, including cost, complexity, risk, and the nature of the project. Businesses need to carefully consider these factors when choosing an appraisal method to ensure that they make the best decision for their specific project.

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