Investment Appraisal Techniques and Factors Affecting Investment Decision Making

This report evaluates two investment options using investment appraisal tools and techniques. It also discusses financial and non-financial factors that affect investment decision making.

Business Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Presenting the viability of project referring investment appraisal tools & techniques................3
Defining financial and non-financial factors which aid in investment decision making............5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
In the dynamic arena, business units are making high level of efforts with the motive to
gain competitive advantage over others. Maximization of profitability and value addition in
capital is one of the main objective of firm associated with potential investment opportunity. In
this report, two investment options will be evaluated by taking into account investment appraisal
tools and techniques. Further, report also entails factors which need to be considered by AJ Plc at
the time of investment selection or decision making.
Presenting the viability of project referring investment appraisal tools & techniques
Given case scenario exhibits that AJ plc has two options for manufacturing purpose with
the initial investment of £140000 & £120000 respectively. In order to evaluate viability
investment appraisal tools have been applied in the following way:
Payback period
This method helps in assessing time period required for the recovery of original
investment (Fontes, Koppe and Albuquerque, 2020). According to the selection criteria, project
with lower payback is good for the firm as it offers opportunity to earn profit earlier.
Project A Project B
Year
Vegan
Chocolates
(cash inflow £)
Cumulative cash
inflows (in £)
Vegan Spreads
(cash inflow £) Cumulative cash
inflows (in £)
1 52,000 52,000 46,000 46,000
2 58,000 110,000 60,000 106,000
3 82,000 192,000 72,000 178,000
4 105,000 297,000 89,000 267,000
5 118,000 415,000 108,000 375,000
2 + (140000 –
110000) / 82000
2 + (120000 –
106000) / 72000

= 2 + .4
= 2.4 years
= 2 + .2
= 2.2 years
Net present value (NPV)
NPV tool of capital budgeting is used by the firm for getting deeper insight about
profitability, pertaining to the concerned investment options, by taking into account time value of
money concept (Knoke, Gosling and Paul, 2020).
Project A Project B
Year
Vegan
Chocolate
s (cash
inflow £)
PV
facto
r @
11%
Discounte
d cash
inflows (in
£)
Vegan
Spreads
(cash
inflows
£)
Discounte
d cash
inflows (in
£)
1 52,000 0.901 46847 46,000 41441
2 58,000 0.812 47074 60,000 48697
3 82,000 0.731 59958 72,000 52646
4 105,000 0.659 69167 89,000 58627
5 118,000 0.593 70027 108,000 64093
Total present value of cash
inflows 293073 265504
Less: II 140000 120000
NPV 153073 145504
By doing assessment, it has found that option of manufacturing Vegan Chocolates aid in
the achievement of organizational goals. Moreover, by applying PV factor @ 11% it has
identified that Vegan chocolate option offers £153073 to AJ Plc after the period of five years. It

shows that this investment option is offering high return over both initial investment and other
option. In contrast to this, recovery period in relation to investment made initially is lower in
Vegan spread option such as 2.2 years. However, payback method presents outcome by ignoring
the time value of money concept (Pawlak and Zarzecki, 2020). Along with this, payback does
not entail cash flows which business unit will get after recovery period. Thus, considering all the
aspects it can be mentioned that AJ Plc should go with Vegan Chocolate option.
Defining financial and non-financial factors which aid in investment decision making
For making optimum utilization of funds and attaining high returns company invests fund
in profitable options. However, along with financial factors there are some non-financial aspects
which significantly impacts viability of investment’s. Hence, while appraising projects manager
of AJ Plc should consider below mentioned factors:
Monetary factors
 Rate of return: In the context of investment appraisal, rate of return need to be evaluated
so that appropriate decision can be made. Moreover, project which has high rate of return
is recognized as more beneficial and helps in getting the desired level of outcome.
 Profit: At the time of investment selection manager is required to keep in mind return in
monetary terms. The rationale behind this, according to time value of money concept
returns vary during projects life (Baum, Crosby and Devaney, 2021). Thus, decision need
to be made referring time value of money concept.
 Fund availability: AJ plc need to assess whether it has enough funds for investment or
not. Moreover, sources of finance such as bank loan has adverse impact on net cash flows
and thereby affects return as well.
 Assessment of cash inflows and outflows: Evaluation of inflows and outflows also need
to be done for analyzing the viability of options. Due to the high cost of material, labor,
overhead, interest on bank loan etc company faces difficulty in generating desired
returns.
Non-monetary factors

 Management team need to make focus on the assessment of legal aspects or rule related
to available option such as licensing, trademark etc. Hence, emphasis need to be placed
on the extent to which AJ plc is able to comply with laws & legislation.
 Success of investment is highly depend on the skills and abilities of personnel (Non-
Financial Analysis in Project Appraisal – An Empirical Study, 2021. In the absence of
having less talented workforce firm would not be in the position of generating higher
returns.
 Potential risks also need to be identified and evaluated by financial manager of AJ Plc.
Moreover, in the absence of having contingent plan AJ Plc cannot fulfill its aim and
objectives.
 Supplier and customer relationship management is crucial when company is planning to
involve in manufacturing project. Accordingly, analysts need to identify whether enough
suppliers are available or not. Referring these aspect AJ Plc can evaluate the suitability of
project to the large extent.
 Competitors assessment is also required for ensuring the aspect of effective decision
making. Hence, firm should evaluate products and strategies as well as policy framework
of competitors for choosing appropriate opportunity out of several options.
CONCLUSION
It can be summarized from the evaluation that investment appraisal techniques help in
assessing the extent to which investment opportunity prove to profitable. On the basis of
outcome derived from evaluation it can be stated that Vegan chocolate option is highly viable as
compared to others. In addition to this, rate of return, profit, resource availability etc are the main
factors which AJ Plc should refer while making assessment of investment opportunity.

REFERENCES
Books and Journals
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Fontes, M. P., Koppe, J. C. and Albuquerque, N., 2020. Comparison between traditional project
appraisal methods and uncertainty analysis applied to mining planning. REM-International
Engineering Journal. 73. pp.261-265.
Knoke, T., Gosling, E. and Paul, C., 2020. Use and misuse of the net present value in
environmental studies. Ecological Economics. 174. p.106664.
Pawlak, M. and Zarzecki, D., 2020. Investment Appraisal Practice in the European Union
Countries. European Research Studies. 23(2). pp.687-699.
Online
Non-Financial Analysis in Project Appraisal – An Empirical Study. 2021. Online. Available
through: < https://www.researchgate.net/publication/267697787_Non-
Financial_Analysis_in_Project_Appraisal_-_An_Empirical_Study >.