Investment Appraisal Techniques

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Investment appraisal techniques Introduction Investment is a key part of building your business. New assets such as machinery can boost productivity, cut costs and give you a competitive edge. Investments in product development, research and development, expertise and new markets can open up exciting growth opportunities. At the same time, you need to avoid overstretching limited financial resources or restricting your ability to pursue other options. Deciding where to focus your investment is an essential part of making the most of your potential. Even a project that is not designed to generate a profit…show more content…
If the trial is successful, you can use what you have learned to make a larger, more profitable investment in bringing the product into full-scale production. On the other hand, making an investment can limit your flexibility to respond to future changes. For example, you would not want to invest heavily in new manufacturing equipment unless you were confident of the demand for your product. Timescales can also be an important strategic issue. For example, shareholders may prefer investments that are expected to produce a quick return. A useful test for a possible investment is to think about your alternatives. For example, instead of buying new machinery you could:  Do nothing.  Do the minimum necessary to maintain your existing machinery.  Achieve a similar outcome a different way, eg by outsourcing production to a supplier.  Invest in an alternative project instead. The investment decision-making process A typical model for investment decision making has a number of distinct stages.  Origination of proposals. It has been suggested that good ideas for investment are likely to occur in environments in which staff feel free to present and develop ideas. Some alternatives will be rejected early on. Others will be more thoroughly evaluated.  Project screening. Before a detailed financial analysis is undertaken a qualitative evaluation of the project will be made. For example, questions will be asked such as whether the project 'fits ' with the
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