The Nature of Investment Decisions and the Appraisal Process

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INVESTMENT APPRAISAL The nature of investment decisions and the appraisal process Non-discounted cash flow techniques Discounted cash flow techniques Allowing for inflation and taxation in DCF Adjusting for risk and uncertainty in investment appraisal Specific investment decisions (lease or buy; asset replacement, capital rationing)

The Nature of Investment Decisions and the Appraisal Process
What is an investment? An investment is any expenditure in the expectation of future benefits. Investments can be made in non-current assets or working capital. What are some benefits from Investing?  Savings because assets used currently will no longer be used o Savings in staff cost o Saving in other operating costs Revenue benefits because of improvement / enhancements o More sales revenue o More efficient system o Savings in staff time Inflow from sale of currently in use assets Intangible benefit o Customer satisfaction o Improve staff morale o Better decision making



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How can investments be categorised? Investments can be categorised into Capital Expenditure and Revenue Expenditure. What is Capital Expenditure? Capital expenditure is expenditure which results in the acquisition of non-current assets or an improvement in the earning capacity of non-current assets.

What is Revenue Expenditure? Revenue expenditure is expenditure which results in maintain the existing earning capacity of noncurrent assets. It also includes expenditure related to selling and distribution expenses, administration expenses and finance charges. What is involved in investments in Non-current Assets? Investments in Non-current Assets involve a significant elapse of time i.e. the time funds are committed to acquiring the non-current to the recoupment of the investment will be long. What is involved in investments in Working Capital? Investments in working capital involve funds invested in resources such as, inventory, before it can be recovered from

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