Capital Investment Appraisal (Accounting for Non-Accountants Book 6)

The Book:

Chapter 13: Capital Investment Appraisal (1)

Growing a business by internal development, as opposed to external investment in other organisations, requires sound commercial judgement. Such growth only occurs when the future returns from internal investment exceed the present costs; this means that managers must test their judgement against the difficulties presented by a highly unpredictable and uncertain future. In considering this problem we ask:

Are there any tools or techniques available from the realms of accounting and finance to help assess the desirability of particular investments? What are the differences between these tools and techniques?

Such evaluations are similar to those made by private individuals when say, buying a car. The decision needs first to be weighed against other spending priorities. Various models would then be considered evaluating the costs and benefits of each before the actual choice is made. After the purchase a conscious or perhaps subconscious evaluation would be undertaken on the quality of the decision.

In this chapter we will provide worked examples cover Simple payback, Accounting rate of return, Net Present Value and Internal Rate of Return. Profitability index and Discounted payback will also be covered.

Chapter 14: Capital Investment Appraisal (2)

This chapter follows on from Chapter 13 and considers some of the problems when applying project appraisal techniques. It then looks at the important differences when selecting Net present value (NPV) and Internal rate of return (IRR). It concludes that NPV should always be used together with Profitability index.

The final two sections discuss and give examples of applying inflation and sensitivity analysis to project appraisal.