Investment Appraisal

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D. 1. 2. 3. 4. 5. 6. INVESTMENT APPRAISAL The nature of investment decisions and the appraisal process Non-discounted cash flow techniques Discounted cash flow techniques Allowing for inflation and taxation in DCF Adjusting for risk and uncertainty in investment appraisal Specific investment decisions (lease or buy; asset replacement, capital rationing) The Nature of Investment Decisions and the Appraisal Process What is an investment? An investment is any expenditure in the expectation of future benefits. Investments can be made in non-current assets or working capital. What are some benefits from Investing?  Savings because assets used currently will no longer be used o Savings in staff cost o Saving in other operating costs…show more content…
Monitoring and review this step involves project control i.e. ensuring that capital spending does not exceed the amount authorised, the implementation of the project is not delayed, and the anticipated benefits are eventually obtained. Non-discounted Cash Flow Techniques What are the Non-discounted Cash Techniques?    Relevant Cost Payback Return on Capital Employed (ROCE) What is Relevant Costs? Relevant costs are costs that are incurred as a result of a decision. What are some relevant costs?    Opportunity cost Variable cost that vary with output (such as working capital cost) Incremental cost (such as Infrastructure and human development costs) What are some non-relevant costs?     Sunk costs Committed costs Overhead absorbed arbitrarily Non cash flow Example BPP text Page 134 What is the Payback Method? Payback method is method that calculates the time it takes for cash inflows from a capital investment project to equal the cash outflows, usually expressed in years. What are the advantages of Payback?      Easy to use, calculate, and understand It is a measure of risk since rapid payback minimises risk Useful approach for ranking projects where a company faces liquidity constraints It is useful for where future cash flows difficult to predict It uses objective cash flows rather than subjective accounting profits What are
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