Investment Appraisal Techniques

Investment appraisal techniques

Introduction Investment is a key part of building your business. New assets such as machinery can boost productivity, cut costs and give you a competitive edge. Investments in product development, research and development, expertise and new markets can open up exciting growth opportunities. At the same time, you need to avoid overstretching limited financial resources or restricting your ability to pursue other options. Deciding where to focus your investment is an essential part of making the most of your potential. Even a project that is not designed to generate a profit should be subjected to investment appraisal to identify the best way to achieve its aims.
Financial aspects of investment appraisal Different appraisal techniques let you assess the effects an investment will have on your cash flow. You can compare the expected return to the cost of funding and to the returns offered by other potential investments. Your assessment should consider all the financial consequences of an investment. For example, buying more expensive machinery might be worthwhile if it is more efficient and uses cheaper supplies. As well as the financial impact, your calculations should also consider any indirect effects. Identifying these soft benefits is often as important as the financial evaluation and may help your decision-making. Soft benefits could be:
 Greater flexibility and quality of production
 Faster time-to-market resulting in a bigger market share
 Improved company image, better staff morale and job satisfaction, leading to greater productivity
 Quicker decisions due to better availability of information.

It is also important to evaluate these benefits. For example, a manufacturer of machine parts could take a general benefit such as quality and break it down with estimated