Investment Appraisal

 What’s it all about?

Techniques that you can use to determine whether it is worth investing in a particular project/machine/product and selecting between alternative options. It includes two that are frankly, a waste of time in practice (Payback, ARR) and two techniques (NPV and IRR) that could be of great use in practice.

NPV and IRR are often taught in Finance modules, so you are likely to come across them in other areas of your studies too. I like teaching them, so don’t mind when they end up in a Man Acc module syllabus.

 

Watch this.

Payback Period.

Accounting Rate of Return

Net Present Value and Internal Rate of Return

 

The related topic of Divisional Assessment…

Return on Investment (ROI) and Residual Income (RI).

 

Further reading.

Interesting article on companies applying discount rates in a way that does not seem logical to us. http://www.independent.co.uk/voices/comment/not-all-discounts-are-welcome-beware-the-myopia-of-company-bosses-10434060.html

A company goes through an Investment Appraisal process to justify getting assistance to buy new equipment. Notice how the investment plans had to be justified. A real example.

http://www.worksopguardian.co.uk/news/local/gainsborough-funding-helps-town-company-create-more-jobs-and-expand-1-7489228

Methods of Investment Appraisal

http://www.icaew.com/en/technical/business-resources/business-management-and-strategy/investment-appraisal/carrying-out-investment-appraisals

What sort of projects does a company consider?

We tend to just use sets of numbers in our calculations, but real companies do it for real reasons. here is one that will be able to reduce variable costs substantially following an investment and therefore increase the contribution from every gallon sold.

http://renewables.seenews.com/news/gevo-plans-to-cut-isobutanol-cost-boost-production-in-2016-494388

Not all projects are assessed only on their financial return. Impact on society is important and can be incorporated into decision making.

http://www.publicsectorexecutive.com/Public-Sector-News/greener-buses-expected-to-deliver-248m-social-benefit-savings-by-2020?utm_source=Public%20Sector%20Executive&utm_medium=email&utm_campaign=7731115_PSE%20Bulletin%20W

Possible Written Questions.

(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.

Critically discuss the strengths and weaknesses of (insert technique here!).

Write a brief memo (I last saw a memo in 2001, they might as well ask you to write a Petition to the King) critically discussing the strengths and weaknesses of ROI as a divisional performance measure and discussing Residual Income as an alternative.