Investment Appraisal: Techniques, Pros and Cons

Running Head: FINANCIAL AND MANAGEMENT ACCOUNTING
FINANCIAL AND MANAGEMENT ACCOUNTING
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1FINANCIAL AND MANAGEMENT ACCOUNTING
Section 5
Investment Appraisal
It is the collection of the techniques that are used for identifying the investment’s
attractiveness. It is concerned with the evaluation of the investment proposal’s attractiveness
by using the methods such as net present value, internal rate of return, average rate of return
or the payback period. Therefore, investment appraisal forms the integral part of the capital
budgeting and it applies to the areas where returns is not easily quantifiable such as
marketing, personnel and training. Therefore, it is the process of planning that is used for
determining the long term investments of the organization such as new plants, new
machinery, research and development projects and so on that are worth funding of the cash
by the capitalization structure of the company. It is the process of allocations of the resources
for their majority of their capital or investments1.
Purpose
The investment appraisal’s purpose is for assessing the viability of the projects,
portfolio or programs decisions as well as the value that is generated by it. In the business
context, the most important objective of the investment objective is for placing the value on
the benefits for justifying the costs. There are most of the factors that forms the part of
appraisal, which includes financial, legal, environmental, social, operational and risks. The
most easily quantifiable approach is financial appraisal, however, it should only be applied to
the benefits, which produces financial results. It has the main objective for increasing the
value of the organization for their shareholders2.
Importance for the business
1 Baum, Andrew E., and Neil Crosby. Property investment appraisal. John Wiley & Sons, 2014.
2 Wnuk-Pel, Tomasz. "The practice and factors determining the selection of capital budgeting methods–evidence
from the field." Procedia-Social and Behavioral Sciences 156 (2014): 612-616.

2FINANCIAL AND MANAGEMENT ACCOUNTING
Considerations of starting the business, contemplating of the investments in the new
or the ongoing enterprise requires for informing the decision with the investments appraisal.
These types of appraisals is very important for various reasons. These types of investments
generally involves committing of the substantial resources. Moreover, these decisions
requires the understanding of feasibility of the both tactical and strategic objectives. Hence,
the understanding of the relative risks depends upon the analysis of the cash flows by using
the ranges of the probabilities such as various inflation rates3.
 General Feasibility: The general appraisal of the project is revealed by the capital
investment appraisal. Projected cash flows as well as projected quarterly or the annual
profits are included under this. It generally includes the analysis of net present value.
Hence, all of these gives the good idea for the probable project’s profitability both in
short and long-terms.
 Alternatives Possibilities: Every investments that is proposed does not exists without
the alternatives. Hence, investments appraisal should provide the review of the
alternatives investments as well as comparison between alternatives projects and the
proposed projects4.
 Financing: This aspects assesses the capital resources that helps in determine whether
the capital resources available makes the feasible investments or not.
 Authorization: Investment appraisal helps in describing the progress that are required
for moving the project from initial investments to the further steps for its further
formalities for required authorizations.
 Uncertainty: Projection of the discounted cash flows that occurs over the time period
requires assignment of the specific values to the inflation rates, regulatory costs of
3 Dyson, R. G., and R. H. Berry. "Capital investment appraisal." Developments in Operational Research:
Frontiers of Operational Research and Applied Systems Analysis(2014): 59.
4 Guerra, Maria Letizia, Carlo Alberto Magni, and Luciano Stefanini. "Interval and fuzzy average internal rate
of return for investment appraisal." Fuzzy Sets and Systems 257 (2014): 217-241.