Traditional Investment Appraisal Techniques Can Not Cope With The Fast Changing Environment

This paper consists of six sections. The research method is briefly described in the first section. This is followed by a section that focuses on the use of financial appraisal techniques. The third section describes the survey findings relating to the treatment of inflation and the fourth is concerned with the use of excessive discount rates. In the fifth section we focus on the appraisal of investments in advanced manufacturing technologies. We conclude with some suggestions for avoiding the pitfalls discussed in this paper.

Myers (1977), Smith and Watts (1992) have found that firm value depends on the future opportunities. If there are lots of investment opportunities available to the firms, it seems that this firm has the capability to generate more cash flow to the firm and to the shareholders. Consequently, this will be reflected in the stock price. So, the value of a firm having much more investment opportunities will be higher compared with the one of a firm with limited set of investment opportunities, which is supported by the result form Allayannis (2001). As an indicator of investment opportunities for the company, PPE, the ratio of a firm's capital expenditures for property, plant, and equipment to total assets and R & D is the ratio

Investment appraisal (for example, estimating clean-up costs at the end of a project life and assessing the environmental costs of a project)

To start of, the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal as well as its strengths and weaknesses. From there, introduce the payback period method and then internal rate

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?

The Investment Appraisal are techniques used in an organisation’s overall strategy and decision of capital investment. In general capital investment appraisal are used for ranking projects. A firm can usually have many projects that are appraised at the same time and those techniques will compare the projects and once completed will determine the highest one and this will be implemented. The investment appraisal considered are: ARR, PAYBACK, NPV AND IRR.

In fully investigating all of our calculations we are fully invested in using the Net Present Value figures we calculated as a means of ranking the eight projects. In doing so we found reasons in which why the Net Present Value was our benchmark for ranking the projects and why we did not use the Payback Method. The Payback Method ignores the time value of money, requires and arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development and new projects. When comparing the Average Accounting Return Method to the Net Present Value method we found that the Average Accounting Return Method is a worse option than using the Payback Method. The Average Accounting Return Method is not a true rate of return and the time value of money is ignored, it uses an arbitrary benchmark cutoff rate, and is based on accounting net income and book values, not cash flows and market values. Plain and simply put, the Net Present Value method is the best criterion to use when ranking these eight

Investment decisions are of vital importance to all, since they determine the potential to succeed. The decision whether or not to invest in a particular business would be based on a careful consideration of some key financial indicators of that particular business.

Johnson Controls, Inc. is a global company that offers services and products aimed at optimizing operational efficiencies and energy of buildings, electronics, automotive batteries and interior systems for automobiles. The company’s headquarters are located in Milwaukee, Wisconsin and is listed on the New York Stock Exchange as a fortune 500 company. Johnson Controls predicts that it will be able to increase its capital expenditures investments by $1.7 billion approximately. Most of the planned capital spending by the company will go to financing margin expansion and growth opportunities. This essay highlights the importance of companies to be able to evaluate investment decisions so that current and capital expenditure on proposed projects and schemes can be done prudently to ensure the company’s success (Johnson Controls (2015).

Standard techniques of quantitative investment appraisal in business today are the payback time method, the internal rate of return (IRR) and the Net Present Value (NPV), Accounting Rate of Return (ARR) rule accompanied with a sensitivity analysis and often also scenarios. The central argument is that the standard techniques fail to capture management’s flexibility to adapt and revise later decisions in response to market development. Below are the few merits and demerits of these Investment appraisal techniques.

There are several criteria of evaluation investment proposal and determine if it can be accepted or rejected. Those criteria that can grouped in two types: discounting criteria and non-discounting criteria. Seven ways used for evaluation of investment proposals which are:

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.

As the world economy is growing with different new company types and services, pressure to managers are seems to be rising. Back in the days owners/stake holders used to make decision for the organization, but now a days as the industry is growing and the workload has been distributed according to employee’s skills. Different department has been established in an organization and even every department managers have to take critical decisions in a glance to justify their business future and Probability. And to make the right decision, there are various kinds of measures that can be applied to the organization to see its growth. Especially in term of investment it is really important to go for the right investment, otherwise the investing capital can waste which is neither good for the Organization nor the managers taking decision upon. So critically evaluate the business facts is a must for both the managers’ career and the company future. So using the measures on right time and right place to make critical decision on short and long term, it is really important to know

Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I