Investment Appraisal
It is important to estimate the benefits of investment wherever possible. Any project which requires an outlay of money or other resources and which then generates a flow of costs and benefits in subsequent periods should be regarded as an investment. The financial appraisal methods helps in guiding whether to incur an expense now so that benefits can be ripped in later periods (investment), or whether the funds should be used to generate immediate benefits, now ( consumption )
Deciding where to focus the investment of an organization is a key for building the business. The various investment appraisal techniques lets a business assess the effect of an investment that will have on cashflow.
There should be sufficient information required to know the project designed for, the different objectives of the project and analyse the benefits and drawbacks of the projects. If interest rates are considered to be high, individuals will be tempted to forgo current consumption. If interest rates are low, individuals will not be induced to save. The investors (private companies or public agencies) who wish to use savings, the role of Interest rates paid on forgone consumption, will find that low interest rates render more projects viable as it’s now more worthwhile to transform interest earning money into a profit making investment, and the demand for funds will thus increase. High interest rates will work in the opposite direction. Thus, interest rates perform an important role in determining the amount of saving and investment in the economy at large. The investment appraisal recognise this time-cost of tying up funds in long-lived projects.
Discounted cash flow techniques are used in both domains to ensure that the estimates of net benefits of alternative courses of action are strictly comparable over time. However, the interpretation of net-benefits is considerably more complex in the government sector. Private firms usually seek to optimise the use of their own
Deciding where to focus the investment of an organization is a key for building the business. The various investment appraisal techniques lets a business assess the effect of an investment that will have on cashflow.
There should be sufficient information required to know the project designed for, the different objectives of the project and analyse the benefits and drawbacks of the projects. If interest rates are considered to be high, individuals will be tempted to forgo current consumption. If interest rates are low, individuals will not be induced to save. The investors (private companies or public agencies) who wish to use savings, the role of Interest rates paid on forgone consumption, will find that low interest rates render more projects viable as it’s now more worthwhile to transform interest earning money into a profit making investment, and the demand for funds will thus increase. High interest rates will work in the opposite direction. Thus, interest rates perform an important role in determining the amount of saving and investment in the economy at large. The investment appraisal recognise this time-cost of tying up funds in long-lived projects.
Discounted cash flow techniques are used in both domains to ensure that the estimates of net benefits of alternative courses of action are strictly comparable over time. However, the interpretation of net-benefits is considerably more complex in the government sector. Private firms usually seek to optimise the use of their own
References: Azzone, g. and Maccarrone, P. (2001) The design of the investment post-audit process in large organisations: evidence from a survey, European Journal of Innovation Management, 4(2001). Lillis, A.M. and Mundy, J. (2005) Cross-sectional Field Studies in Management Accounting Research – Linder, S. (2005) Problems associated with conducting post-completion audits: a review of the research, Corporate Finance Review, Jul/Aug, 10. Marquardt, M. and Reynolds, A. (1994) The Global Learning Organization. (Burr Ridge, Illinois: Mills, R.W. and Kennedy, J.A. (1993) Experiences in operating a post-audit system, Management Accounting (UK), November. Mirrlees, J. A. (1979 and 1982). Project Appraisal and Planning in Ward. Northcott, d. and Alkaraan, f. (2007) Strategic investment appraisal, in Hopper, T., Northcott, D. and Scapens, R. (eds.) Issues in Management Accounting, 3rd ed. (Harlow: Prentice Hall).