Investment Appraisal Techniques

Decision Making Area 3:Investment Decisions * Table of Articles * Summary of Articles * Observations * Conclusion

* A new project idea which requires an investment of $2 mm and will generate total cash flows (including any salvage or terminal value) next year of either $4mm (recession) or $8mm (boom). The firm has not yet raised the cash to make this investment, but the market is aware of the investment opportunity.

With any major investment, it is important to consider the monetary and non-monetary aspects including gaining an understanding of the culture, the ideal management approach, past and future trends, along with political roadblocks.

The capital investment I chose is the start-up of an assisted living center; specifically, “Dershane’s Assisted Living”. There are several arguments that could be used for the capital investment proposal. Since this would be a new capital investment, financial arguments against the proposal would be the principal factor.

company is considering a capital investment in a new machine and you are in charge of making a

The management team at Savage Corporation is evaluating two alternative capital investment opportunities. The first alternative, modernizing the company’s current machinery, costs $45,000. Management estimates the modernization project will reduce annual net cash outflows by $12,500 per year for the next five years. The second alternative, purchasing a new machine, costs $56,500. The new machine is expected to have a five-year useful life and a $4,000 salvage value.

D. D. Williamson created a list of 78 projects which needed to be prioritized, organized, and selected. The company used a four step method to rate each project: 1) Establish criteria for prioritizing projects. 2) Weigh each criterion. 3) Refine the list of projects. 4) Rate each project on each criterion and total ratings.

Investment decisions companies make today will have a direct impact on their ability to reach financial objectives. Most companies are faced with questions such as: which projects should your company invest in, which returns are needed and what risks are the company willing to take to achieve company goals?

Other issues that must be considered is whether you have changed any methods of operation in order to improve profitability, whether you have any knowledge needed to continue with activity as a business, whether you have made any profits from similar activities in the past and whether the present activity makes a profit in some years and finally, whether you expect to make future profits from any appreciation in the value of assets that are used in the activity.

To run a successful business it is important for the Manager to make strategic capital investment decisions, in order to make

Over the course of four weeks Cosmo K Manufacturing Group has been proposition on multiple different forms of investments. A comprehensive finical analysis was compiled in order to evaluate all of the investment opportunities. Initially a ratio and trend analysis is explained in order to demonstrate the basics of finance. Multiple investment opportunities will be evaluated to determine the best contender. Cash flows will be evaluated and an explanation on increasing accuracy is provided. Two mutually exclusive investments will be examined to determine which one is more accurate.

When considering the proposed advertising program and technology upgrades, we have to ensure that the project will likely add value to the company, so we need to consider the return on investment versus the cost of capital. If the return on investment, measured by the net present value and internal rate of return, exceeds the cost of capital, the investment should be taken.

2. Maximization of Shareholder wealth: Investment decision is linked with strategic and tactical business decisions and therefore need to achieve desired long-term objectives. The most usual objective being the maximization of shareholder wealth.

According to the business dictionary, investment appraisal is the technique used to determine if an investment is going to be profitable or not. Investment decision is extremely vital because it is consistently concerned with the future survival, success and growth of the organisation. The primary objective of an organisation is maximization of shareholder wealth; investment must make not only to maintain shareholder’s wealth but also to increase it. To ensure the maximization objective, it is important that the management managing the organisation make best decision that are based on the best information available and use of the most appropriate appraisal techniques.

An investment also known as a security is a pledge of money from an individual, government, or cooperation that is expected to accrue additional wealth on top of its original dollar amount. An investment can be a long-term or short-term obligation depending on the investor’s goals and/or assets they choose to invest in. The investment decision process is a two-step process which is necessary to make a sound trustable and efficient investment. The first step involves an evaluation of the investment you as the investor are interested in committing money towards, including characteristics of the security (i.e. how it acts in the current market, how the current/future market may react to this investment and possible returns on your investment). Finally, the management of your investment portfolio, including how often it should be revised, how the performance of your securities should be measured (how often they should be measured), and other important aspects of your current investments. Investing revolves around one basic concept, improving our future, investors invest money today to improve their welfare in the future which is why understanding what an investment is and the process of decision making before investing is extremely important.