Appraisal Techniques in Investment Decision Making

In conclusion, the importance of appraisal techniques in investment decisions is emphasized. Management uses various techniques to determine the best investment options for their enterprise, aiming to provide maximum benefit and profitability. The report highlights that any strategy adopted by a company must consider adverse situations that may arise if decision-making fails to apply proper techniques. Therefore, this report provides better understanding of investment appraisal strategies and reduces possible damages.

Financial and
decision making
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TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
2. Explain investment appraisal techniques with assumptions, limitations, context and
applicability.................................................................................................................................4
Risk management techniques in capital appraisal.......................................................................7
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9
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INTRODUCTION
Investment appraisal techniques is mathematical method which management use to
determine the benefit for future. There is managerial person use this method for better
forecasting in future time-period. It assumption based techniques which provided possible helps
to managerial or investor for taking best decision which provided maximum profit to company.
In this present report consist of various type of appraisal techniques which used by investor for
for purpose of earn maximum benefit (Allen and Economy, 2011). In other hands it consist of
example in table formate which is analysis by applied appraisal technique. For purpose of taking
better decision for maximum profit in future time period. Investment appraisal technique it
determines that spend of investment which provide return in highly (Allen and Economy, 2011).
Right decision at right time take Benefit as well as leadership team work as accordingly while
poor decision take does not effective and company suffer loss. In this report contain the various
techniques which helpful in right step by the management. Appraisal technique also known as
the capital budgeting is primarily planning process which facilitated to manage investment
either short term or long term. It is the techniques to use better use of their various expenditure
thus such saving from the right management called the saving for enterprise (Bennouna,
Meredith and Marchant, 2010). It is also mange by inter firm and intra firm comparison thus it
helps to manges and serves investment as according to requirement.
Type of the business techniques
1. Real option analysis
2. Accounting rate of return
3. Adjusted present value
4. Profitability index
5. Equivalent equity
6. Pay back period
7. Discounted pay back period
8. Modified internal rate of return (Bennouna, Meredith and Marchant, 2010).
9. Internal rate of return
Type of resources
1. Equity investment
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2. Human resources
3. Interest on investment
4. Organisation profitably
Hence, this present study contain, decision making of the managerial person in selecting
the capital appraisal technique which gives the better knowledge that any of the particular project
gives the maximum benefit to company.
Explain investment appraisal techniques with assumptions, limitations, context and applicability.
1. Net present value – This type of technique focus on cash inflow and outflow thus it has
single objective (Bennouna, Meredith and Marchant, 2010). It the mathematically
evaluation of the cash at the present time value because value of the cash vary by the
inflation and deflation rate thus it measures their actual value therefore, company know
their position.
 Advantages –
◦ Cash in company vary their value at the time to time because of inflation rate thus
today cash power not same as past cash value thus it.
◦ Value of time is considered
◦ Powerful techniques use in the all aspect of the law (Brotman, 2010).
◦ This technique is base on the cash flow
◦ Fix discounted rate analysis of whole value.
 Disadvantages –
◦ It shows the quantitative data which not be accurate and not applicable on all type of
purchase.
◦ Difficult to identified the discount rate in respect to present value.
Year Proposal 1 Proposal 2
0 £280,000.00 £280,000.00
1 £75,000 £86,000
2 £80,000 £85,000
3 £68,000 £71,000
4 £55,000 £54,000
Total £278,000 £296,000.00
NPV
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Investment appraisal techniques
NPV Project A
year inflow PV Factor
Inflow by considering
pv factor
1 £75,000 0.909 £68,175
2 £80,000 0.826 £66,080
3 £68,000 0.751 £51,068
4 £55,000 0.683 £37,565
Total inflow £278,000 £222,888
Less: Initial investment £280,000
Net present value -£57,112
NPV Project B
Year Inflow PV Factor
Inflow by considering
pv factor
1 £86,000 0.909 £78,174
2 £85,000 0.826 £70,210
3 £71,000 0.751 £53,321
4 £54,000 0.683 £36,882
Total inflow £296,000.00 £238,587
Less: Initial investment £280,000
Net present value -£41,413.00
NPV shows actual value after 4 year from initial investment. It is exhibit that initail
investment in proposal 1 is become £222888 which show loss of the £57112 amount while
proposal 2 shows NPV £23857 which also shows loss of the £41413 (Bhaird, C., 2010).
Therefore, there is most appropriate proposal will be project B because loss of value is lower
than project A.
1. Accounting rate of return – It is determined the profit earn by initial investment which
spend in new project (Brotman, 2010). Thus, it is evaluation of the profit earn by the
initial investment. It determination of benefit arising from project as percentage of the
initial capital cost.
ARR = [average annual value/ initial capital costs]*100
 Advantages –
◦ It is simple to calculated as well as easy to understand. Thus, many of the business
use as planning purpose.
◦ It is base on the profit earn so it is easy to understand.
 Disadvantage –
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◦ It is based on the basis of the assumption basis. Thus, not guarantee to accuracy.
◦ It not bases on time value of money so it is not considered a true rate of return.
2. Cost ratio – It is discounted net revenues divided by the initial investment. Thus, ratio
must be exceed than 1 (Gitman, 2013). The project ratio benefit is less than 1 thus it is
not proceeds. It is because any of organization except benefit at least the cost spend on
project thus if benefit less than 1 than it is treat as the company not successful to use
project cost.
 Advantages –
◦ It is simple to determined for company and find the drawback arise.
◦ Easy to understand.
 Disadvantages –
◦ These techniques not show actual occurrence for such loss thus this may be
inaccurate (Brotman, 2010).
◦ Not provide the actual situation of the company.
Average
accounting
rate
year inflow
1 £75,000
2 £80,000
3 £68,000
4 £55,000
Total inflow £278,000
Average
inflow £69,500
average
investment £80,000
ARR 86.88%
year inflow
1 £86,000
2 £85,000
3 £71,000
4 £54,000
Total inflow £296,000
Average
inflow £74,000.00
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average
investment £80,000
ARR 92.50%
Analysis
ARR shows that proposal 1 gives the Average inflow £69500 and ARR percentage shows
86.88% while proposal 2 shows average inflow for £80000 and ARR percentage shows 92.50%
which is higher inflow (Heberle and Christensen, 2011). So it should that proposal 1 can gives
more inflow benefits to entrepreneur.
1. Payback period – This type of techniques use by the company to know investment
recovery which spend initially (Gitman, 2013). Thus, in method company assume that the
inventive spend in any of the project how many times it will be recover. These
techniques' basis on inflation rate thus, management calculated their return as
accordingly. It must be noted that the return period is longer than the predetermined than
such project will be rejected.
 Advantage –
◦ This method is helpful for managerial person to determined that investment in any of
project may gives profits or not.
◦ the managerial person see the return by the calculated the NPV method.
◦ It simple to calculated and easy to understand (Lapsley, Miller and Panozzo, 2010).
◦ It added some improvement over the accounting rate of return.
 Disadvantage – because of the managerial person assume on the basis of situation,
economy condition therefore, it may be change according to climate changes (Heberle
and Christensen, 2011). Thus, it is not possible to determined the future climate.
payback period
year inflow
Cumulative
inflow
0
-
£280,000.00 -£280,000
1 £75,000 -£205,000
2 £80,000 -£125,000
3 £68,000 -£57,000
4 £55,000 -£2,000
Rate of return 0%
time of recover 3.83823529
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year inflow
Cumulative
inflow
0
-
£280,000.00 -£280,000
1 £86,000 -£194,000
2 £85,000 -£109,000
3 £71,000 -£38,000
4 £54,000 £16,000
Rate of return 2%
time of recover
3.28235294
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Analysis
On the basis of analysis of the two factor it is exhibit that investment in proposal 1 not
provided even invested amount and rate of interest is also 0% (Milner and Rosenstreich, 2013).
Where proposal 2 provided return 2% on invested amount along with total amount recovered
within 2.28 month.
1. Internal rate of return – project must be provide profit at least as accordingly to company
cover internal expenditure (Harris, 2016). Therefore, if cost of company is more than IRR
than such project will be rejected while lower project will be accepted. This rate helps to
the company to determined that which of the project should be gives the future benefits.
 Advantages –
◦ It is future assumption to know the profitability from the particular project.
◦ It reasoned the risk of project.
 Disadvantage –
◦ It is hard to determined because of it calculated only if NPV become zero.
◦ Without the computer, it hard to determined (Heberle and Christensen, 2011).
◦ Because of it generate the difference rate so decision process could be muddled.
◦ Non follow of cash standard that's why profit may be show the inaccurate result.
Calculation of unit
price
33.33 % mark-up on cost price 30 % return on capital employed
Direct cost 15000 Direct cost 15000
Fixed Cost 8000 Fixed Cost 8000
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Total Cost 23000 Total Cost 23000
Units 1000 Units 1000
Cost per unit 23 23
33.33 % mark-up on cost
price 7.67
30 % return on
capital employed 15000
Per unit return 15
Selling price 30.67 38
Above chart shows that option for choosing method for calculated the selling price. There
one of the chart shows that calculation of unit on the mark up on cost method and another
method calculated on capital employed basis (Murphy and Yetmar, 2010). Thus, company
should calculated per unit price on mark up basis because this method helps to maintain stability
on market by giving product on lower price.
1. Comparison of inter-firm and intra-firm – It is the technique in which any of firm can
decide their techniques and strategy as according to same firm comparison (Lapsley,
Miller and Panozzo, 2010). Therefore, it provides the clear guidance to the company for
adopt any of the planning which helps reduce the problem.
 Advantages – There is firm know the actual problem arise and which action must take for
reduce such particular problem. Disadvantage – Because of it not base on the actual solution thus it just provide the
guidance which applicability not prove the guarantee profit.
1. Profitability index – There is project evaluate on the basis of unit of investment. It is ratio
to know as investment value use in the project (Vimpari, Kajander and Junnila, 2014).
Therefore, their return profit must sufficient as investment.
 Advantages – because of the investment evaluate on the basis of the per unit of actual
project. Disadvantage – Investment is according to per unit project not gives profit as according
to assumption.
1. Discount value analysis – There is the company value their investment on rate of
discount rate basis (Lapsley, Miller and Panozzo, 2010). Therefore, it multiplies with
total value of investment and prepare strategy for the actual amount must be recover.
 Advantages – There is company decided their actual return which required to recover in
the future
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 Disadvantage – because of the DRR is base on the assumption basis thus it not
guaranteed to success.
1. Real option analysis – In this manager, consider all the option and choose the option
which gives the more cash inflow (Milner and Rosenstreich, 2013). Therefore, cash
inflow must be on the basis of NPV value.
Risk management techniques in capital appraisal
Mini-max regret – It is one of the strategy to decide that what action taken if any of the adverse
situation arise cause by the wrong decision (Murphy and Yetmar, 2010). This type of action arise
by the wrongfulness of the managerial person decision making.
1. Sensitivity analysis – It is measure by the What if analysis (Hamad, 2016). There is the
objective and the strategy are in the written form which severs to all at one objective.
2. Maxi-mine – this of the decision work on the maximum profit with minimum alternative.
There is director assume the worse situation arise by the different decision and finally
choose accurate worst situation arise in the company (Vimpari, Kajander and Junnila,
2014).
3. Maxim-ax – This the alternative method to choose the highest alternative outcome arise
by the technique use (Milner and Rosenstreich, 2013). There is prepared table to choose
the different possible outcome. That is best for the managerial person. Therefore, it is
assumed analysis of outcome choose by the analysis of study of different situation.
4. Cost of uncertainty – In this the company maintain one of the account for adverse
situation arise at the time of the future occurrence (Prorokowski, 2011). Therefore, it is
essential to maintain the one of the small amount for the uncertain situation which arise
by future uncertainty.
5. Maintain loss - There is managerial person except possible loss from the outcome. There
is small part get separate from the total expected profit because of it is necessary in to
being secure in adverse situation (Nguyen, 2010). This because any of the company
should assume negative occurrence by the techniques otherwise it may gives large
amount of loss to company. Hence, it is called the managerial techniques.
6. Forecasting – There is management forecast the situation which assumed to happened
arise in the future and evaluate the decision as best which secure the investment on the
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basis of NPA (Nguyen, 2010). It is important techniques which use in any type of the
organization to determined by the higher authority of the company (Allen and Economy,
2011). Therefore, it is the method to applied by the higher authority of the company for
determine the future uncertainty that aware to the management for use any of the
techniques with determined future occurrence (Hamad, 2016).
7. Brainstorming techniques – In this type of the technique, management use group
discussion with subordinate or interest person and seek the problem arising from
particular situation from the selective techniques (Prorokowski, 2011). This is because
such list shown the actual problem thus director use it as priority basis. Because of the
every person view may be vary in the particular thing but ti helps to access the risk as
possible. Therefore, it reduces the possible damages.
CONCLUSION
Summarise of above study shows that appraisal technique are more importance in
investment. It is used by management person for taking best investment decision. It is helps to
know that which type of investment gives maximum return in the future. Therefore, management
use various kind of techniques for determined best investment for their enterprise. Hence, in this
report added example which shows that management used techniques for choosing involvement
technique. Report shows that investment appraisal techniques used to provide maximum benefit
to organisation. As per given examples management should choose proposal 1 because this
proposal gives maximum benefit in all technique along with it is giving more profitability to
company for long time.
The present report concluded that various type of the appraisal technique use by
managerial person in the organisation. This helps to investment in right place with choose
accurate techniques that's why enterprise earn maximum profit. Thus, it chooses by company
with analysis of their actual position and also determined the worse situation. It also this report
also contain the adverse situation arise if decision making fail to apply proper way. Hence, their
report show that any of the strategy adopted by company must be focus on the adverse situation
arise if it fails to do. Thus, this report helps to better understanding of investment appraisal
strategy.
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REFERENCES
Books and journals
Allen, K. and Economy, P., 2011. Complete MBA For Dummies. John Wiley & Sons.
Bennouna, K., Meredith, G. G. and Marchant, T., 2010. Improved capital budgeting decision
making: evidence from Canada.Management Decision. 48(2). pp.225–247.
Bhaird, C. M. A., 2010. Resourcing Small and Medium Sized Enterprises: A Financial Growth
Life Cycle Approach. Springer.
Brotman, B. A., 2010. The impact of market conditions using appraisal models. Journal of
Property Investment & Finance. 28 (3). pp.237 – 242.
Gitman, J. L., 2013. Personal Financial Planning. Cengage Learning publication.
Heberle, L. C. and Christensen, I. M., 2011. US environmental governance and local climate
change mitigation policies: California's story. Management of Environmental Quality: An
International Journal. 22 (3). pp.317 – 329.
Lapsley, I, Miller, P. and Panozzo, F., 2010. Accounting for the city. Accounting, Auditing &
Accountability Journal. 23 (3). pp.305 – 324.
Milner, T. and Rosenstreich, D., 2013. Insights into mature consumers of financial services.
Journal of Consumer Marketing. 30 (3). pp.248 – 257.
Murphy, S. D. andYetmar, S., 2010. Personal financial planning attitudes: a preliminary study of
graduate students. Management Research Review. 33 8, pp.811–817.
Nguyen, K., 2010. Financial Statement Fraud: Motives, Methods, Cases and Detection.
Universal-Publishers.
Prorokowski, L., 2011. Trading strategies of individual investors in times of financial crisis: An
example from the Central European emerging stock market of Poland. Qualitative
Research in Financial Markets. 3 (1). pp.34 – 50.
Vimpari, J., Kajander, J. K. and Junnila, S., 2014. Valuing flexibility in a retrofit investment.
Journal of Corporate Real Estate. 16 (1) pp.3 – 21.
online
Hamad, S., 2016. Financial analysis and management. [online]. Available through
<http://www.academia.edu/8012185/Financial_Management_Investment_Appraisal_Tech
niques>. [Access on 4 May 2016].
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Harris, E., 2016. Project Risk Appraisal Techniques. [online]. Available through
<http://www.gpmfirst.com/books/strategic-project-risk-appraisal-and-management/project-
risk-appraisal-techniques>. [Access on 3 May 2016].
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