Application Of Discounted Cash Flow Techniques In Projects Appraisal
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Background To The Study After NARC Government came into power, a survey was done on poverty levels in Kenya and it was observed that poverty incidences had reached unprecedented level of 57% of the population (UNDP, June 2005.) and the trend was projected to continue. This called for urgent measures. Among the measures taken by the Government was channeling funds to districts and constituencies for development and poverty alleviation. These funds include: .~ Constituency Development Funds (CDF) ~ Poverty Alleviation Funds (PAF) ~ Local Authority Transfer Funds (LATF) ~ Constituency Bursary Fund (CBF) ~ Constituency Aids Fund (CACC) These funds are supposed to be used within the assigned constituencies for development purposes. The constituents are supposed to participate through their chosen representatives in the respective committees and come up with their development projects that will improve their economic status. Due to limited funding, it's not possible to implement all projects proposed by the people. ,> .. There is therefore a need to come up with methods of choosing the most profitable, suitable and viable project to fund and consequently implement. 1.1 Purpose Of The Study The purpose of this study is to analyze the different development projects proposed by the constituents to be funded through the CDF in Gatundu South constituency of Thika district and appraise them ranking them in order of viability. 1 1.2 Objectives Of The Study To appraise and rank CDF projects in Gatundu South constituency using discounted cash flow techniques through: • Calculating the Net present value (NPV) and accumulations of payments and expected receipts from the projects. • Calculating the expected Internal rate of return (lRR) from the projects. • Calculating the expected discounted payback period (DPP) for the projects. • Calculating the profitability index for the projects. • Ranking the projects on the basis of all the methods above. • Comparing the rankings above to determine the most suitable appraisal method 1.3 Significance Of The Study Poverty has adversely affected the majority of Kenya population. The measures taken by the Government in channeling funds to the constituencies can go a long way in alleviating this menace and improving the living standards of the constituents if well utilized. It is hoped that the findings of this study will be useful to: • The CDF committees in determining the development projects to prioritize. <•• • The constituents in monitoring the implementation of the proposed CDF projects. _ • The Government in monitoring how the CDF funds are used. • Investors who have a range of mutually exclusive investments to undertake. 2 1.4 Methodology Methodology entails the research instruments applied in data collection. In carrying out this study the.methods applied were: • Interview- some CDF committee members were interviewed. • Sampling- some projects were accessed for study purposes. • Some information was availed from the CDF records e.g. project proposals and data on amount of funding. 1.5 Assumptions a. The projects under study are independent investment projects. b. The interest rate is constant throughout the investment period at a rate of 12% per annum. c. There is no investment risk. Risk has not been taken into consideration otherwise adjustments for risk allowance could have been made through either risk-adjusted discount rate or certain equivalent method. d. Future inflation effects have been ignored otherwise adjustments could have been made through introduction of inflation index. e. There is no any other funding of the projects nor is there external borrowing. 1.6 Study Limitations .. Some of the limitations faced during the study are: • The time allocated for this study was limited and hence not sufficientJor a comprehensive study. • Due to a financial constraint it was not possible to carry out a detailed study e.g. it was not possible to visit some of the implemented projects. • Some of the data given was censored. • Political misconception- some committee members interpreted the study as a political tool.