INVESTMENT APPRAISAL

Investment Appraisal



Table of Contents

Introduction3

Investment Appraisal4

Conduct a strategic assessment5

Payback Period5

Average Rate of Return6

Net Present Value6

Assumptions7

Internal Rate of Return8

Analysis of Investment Decision9

Sensitivity Analysis10

Conclusion and Recommendations11

References13

Investment Appraisal

Introduction

The world economy is currently hindered in the most severe financial and economic crisis since World War II where most economies is experiencing the sharpest fall in consumers' and business' confidence in the last 20 years and commodities have suffered their biggest decline since the 1930s. Even though governments all over the world are impelling billions of dollars into the banking system, companies of all sizes struggle to acquire new finance or even maintain existing levels of borrowing. Banks are selecting whom they borrow and they charge more, corporate bond markets are closed to all but the best rated companies and investors lost their confidence. Companies seek to maximize their value by undertaking any investment decision (and by recognizing that the company's value is determined primarily by the present value of its expected future cash flows). To assist in making investment decisions and ensure consistency, methods of investment appraisals are required to help to decide whether any individual investment will enhance the shareholders wealth. Moreover, once future cash flows are estimated, the investment projects are then subject to evaluation techniques to further assess their potential for achieving the financial objectives of the company.

An investment can be defined as an outflow of resources which is followed by monetary flows are also monetary. To evaluate an investment should be taken into account Revenue and output that the investment will produce during its life and not the revenues and costs. In other words, one must proceed with analysis using the cash flows of the project.

Investment Appraisal

One of the most important aspects of corporate finance is the valuation of investments that a business owner (or aspiring) should do before embarking upon any economic initiative, whether it be a new business idea, whether it be an acquisition of new machinery or equipment to improve business efficiency of a firm already operating.

The present market and economic situation have led to several changes in the financial objectives as well as the investment strategies. Before discussing the impact of economic uproar on the investment side, it is imperative to understand and evaluate some of the important and widely used investment appraisal methods, along with their pros and cons. Investment appraisal refers to a set of tools that facilitate the mangers in investment related decisions (Dooley, 2009, p.136). These techniques provide a direction on the basis of which the investor or manager may select any particular venture or business proposal. Different methods have their own benefits and drawbacks. The most effective and accurate tool is still the topic of debate among the investors and financial society. It also depends upon the venture, the business operations and the market statistics, as to which method will be more appropriate. A financial manager needs to justify why he have chosen a particular venture, on what basis and what were the selection criteria for investment appraisal ...