5 Quantitative Techniques of Investment Appraisal
Investment Appraisal assesses the attractiveness of different capital projects. These projects usually involve a high level of expenditure and cannot be easily reversed. They also involve a high degree of risk.
One of the key areas of long-term decision-making that firms must tackle is that of investment — the purchase of the Fixed Asset with the potential to yield future financial benefits. The business organization commits funds by purchasing land, buildings, machinery and so on, in anticipation of being able to earn an income greater than the funds committed.
In order to handle these decisions, firms have to assess the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds. Therefore, an important step in the capital budgeting cycle is working out, if the benefits of investing large capital sums outweigh the costs of these investments.