Capital budgeting projects are classified as either Independent Projects or Mutually Exclusive Projects. Thus, all Independent Projects which meet the Capital Budgeting criterion should be accepted. Mutually exclusive projects are a set of projects from which at most one will be accepted. For example, a set of projects which are to accomplish the same task.
Investment appraisal is a collection of techniques used to identify the attractiveness of an investment. General The purpose of investment appraisal is to assess the viability of project, programme or portfolio decisions and the value they generate.
In the context of a business case, the primary objective of investment appraisal is to place a value on benefits so that the costs are justified. There are many factors that can form part of an appraisal. An investment decision may be justified because it reduces risk.
A financial appraisal is the most easily quantifiable approach but it can only be applied to benefits that produce financial returns. The simplest financial appraisal technique is the payback method.
The payback period is the time it takes for net cash inflow to equal the cash investment. This is a relatively crude assessment and is often used simply as an initial screening process.
However, this has the disadvantage of not taking into account the timing of income and expenditure. This makes a significant difference on all but the shortest and most capital-intensive of projects.
In most cases, discounted cash flow techniques such as net present value NPV or internal rate of return IRR are appropriate to evaluate the value of benefits and alternative ways of delivering them.
NPV calculates the present value of cash flows associated with an investment; the higher the NPV the better. This calculation uses a discount rate to show how the value of money decreases with time. Appraisal of capital-intensive projects and programmes should take into account the whole-life costs across the complete product life cycle as there may be significant termination costs.
In the case of the public sector, where income is usually zero, it is common practice to identify the option with the lowest whole-life cost as the option that offers the best value for money.
The appraisal on less tangible and non-financial factors is more subjective. In some cases, a financial value may be calculated by applying a series of assumptions. For example, work that improved staff morale may lead to lower staff turnover and reduce recruitment costs.
A financial appraisal of this benefit would have to include assumptions about the numerical impact of increased morale on staff turnover and the estimated costs of recruitment.
Where benefits cannot be quantified then scoring methods may be used to compare the subjective value of benefits.
Project Stand-alone projects will use investment appraisal to compare alternative approaches to achieving the required benefits.The intended use is to evaluate the property that is the subject of this appraisal for a mortgage finance transaction, subject to the stated scope of work, purpose of the appraisal, reporting requirements of this appraisal report form, and definition of market value.
This is known as investment appraisal. Investment appraisal is crucial to a business due to: Large sums are necessary to invest in projects and therefore care needs to be taken with the decisions, as they are difficult to reverse. The basics of investment appraisal and making investment decisions are explored in this revision presentation.
Capital budgeting, and investment appraisal, is the planning process used to determine whether an organization's long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings).
Investment appraisal is a key area in most businesses. Decisions concerning capital expenditure, coupled with strategic planning, marketing and organisational design are frequently critical in determining the future success of the business.
This document advises managers on how they can contribute. ADVANCED INVESTMENT APPRAISAL Investment appraisal is one of the eight core topics within Paper F9, Financial Management and it is a topic which has been well represented in the F9 exam.
The methods of investment appraisal are payback, accounting rate of .