Investment Appraisal

Topics: Investment, Risk, Decision making Pages: 11 (2528 words) Published: March 25, 2011


The government undertakes a variety of activities. They are responsible for setting macroeconomic policy; they seek to promote equity by aiding the poor and the disadvantaged and they provide a variety of services, such as education, health Care, defense, infrastructure, police and postal services.

Many of these activities involve large investments. Recent developments such as expanding the N3 Network infrastructure in preparation for the GP – Led health care commissioning across Britain have raised the issue of which of the investment proposal by the various service providers will be adopted and which assets should be owned by the public sector, whether assets have different values in the public and private sectors and how to price assets that are transferred between these two sectors. The crux of each of these questions is whether investment appraisal in the public sector should be different from the private sector. In this report I will be looking at investment appraisal within the UK health service organization (NHS)

Investment Appraisal is a critical tool in making key and strategic decision. By adopting it as a strategy, the NHS is more likely to achieve its objectives efficiently and effectively. It encourages the central government and managers alike to question and justify what they are doing and it sets the tone for thinking rationally about value for money. The majority of literature relating to investment appraisal provides instruction for large capital projects schemes, which are generally funded from centrally controlled resources, known as discretionary allocations or commissioning budget (that is at the discretion of the NHS Executive), or through private finance.

The purchase of capital is an investment and the NHS finance directorate is required to demonstrate a 'return'. The return could be measured financially by cost savings; it could also be in terms of benefits to staff or patients, or preferably a combination. The aim of the investment appraisal process must be to demonstrate that:

• The investment is necessary and achieves optimum value added.

• The proposed investment scheme stands or falls by its own appraisal, independently of whether funds are currently available.

• There is a commitment to effective project implementation and post-completion reporting.

The aim of this report is to recommend a process to ensure capital investment decisions are appropriate, whilst ensuring the cost of the process does not outweigh the benefits. If there is no formal process for assessing capital expenditure then this should be challenged and criticized. This report also attempts to streamline the investment decision with the Performance Assessment Framework by looking at indicators such as the contribution to 'Effective delivery of appropriate healthcare through improved clinical information system ', 'Efficiency' and the achievement of value for money. Secondly, this report aims to produce a set of specific guidelines specifically for NHS wandsworth which is attached as an appendix.

The management accountant is welcome to adopt this process in full or part, or adapt it to suit local circumstances


Before the proposal is subject to detailed evaluation, it is useful to undertake preliminary investigation to determine if the proposal appears to be a feasible project. This initial investigation will consider such factors as, the resources required, the technical and commercial feasibility, the risks of the project and how the project matches the firm’s strategic objectives.

It is important that the organizational, divisional and departmental objectives are reviewed in identifying specific capital project and also during the decision making process. During the business planning process the organization specific...
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