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

2151 Words9 Pages
Subject: Financial Management
Matriculation number: 40127207
Word count: 1,769

Coursework Assignment
“Traditional Investment Appraisal techniques cannot cope with the fast changing environment in manufacturing industry today”

Discuss the above statement with reference to available academic literature
A reading list is attached of some relevant articles in the area.
This is by no means exhaustive, you should also find additional reading yourself

Introduction The current business environment is undergoing a lot of change and firms are under increased pressure to respond and adapt to changing market conditions. Due to this firms have began rethinking their industry structures and improving their investment appraisal
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The factors that affect investments are based on the priorities of the stakeholders and decision makers, which are either based on long term growth or short term profit. In most cases firms tend to invest over long term (Adler R.W. 2000). There are many formal methods that are used in Investment appraisal and many of which are criticized as being traditional;
• Payback,
• Accounting rate of return (ARR),
Net present value (NPV),
• Internal rate of return (IRR),
• Modified internal rate of return,
• Multi attribute decision model (MADM),
• Computer integrated manufacturing (CIM). Within investment appraisal there are traditional methods that have been used for years while there are other methods that have been modified to account for factors that are not considered in the traditional methods (discussed more below). An example of this would be for a traditional method such as payback it is not enough to just use it alone as a decider for an investment, other methods must be looked at too (Adler R.W. 2000).
Traditional Investment Appraisal Techniques Modified Payback period is considered to be the easiest method of investment appraisal basically because it judges an investment based on time taken to get back the initial investment. Almost 9 out of ten firms use Payback (F.M. Wilkes, J.M. Samuels, S.M. Greenfield, 1996). Projects with shorter payback period are seen as more attractive by
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