Decision makers at many levels of organizations are frequently confronted with important choices concerning financial aspects of the organization. When faced with alternative possible courses of action, the outcomes of which are uncertain, companies need to invest in wealth-creating assets in order to renew, extend or replace the means by which they carry o their business. Capital investment, then, allows companies to continue to generate profits in future periods or to maintain the profitability of existing business activities.
Since the high inflation experienced in the1970s, it has been important to account for inflation in the investment appraisal process in order to prevent sub-optimal decisions being made. The techniques to deal with the problem of inflation that have been discussed earlier (see section 4.3) are:.
2.0 Concept of Capital Investment Appraisal.
A capital investment appraisal is a financial assessment of the cost effectiveness of a capital project set against economic criteria. It is a means of ensuring value for money in relation to developing an estate strategy and capital project. A capital investment appraisal is not meant to provide an indication of profit or loss for the institution as a whole, but rather a comparison of costs in relation to those areas of the estate where there is an opportunity or an inclination for change.
3.0 An Overview of Investment Appraisal Methods.
Preparing a capital expenditure proposal is an iterative process. It is rather like budgeting, all the contributors to the process - the engineer, salesman, raw material purchaser, production and technical representatives, etc. The capital appraisal techniques outlined in this chapter provide a financial scenario which each set of circumstances throws up. .
Because of the importance of these long-term decisions, managers normally seek help from their management accountants. Over the years several methods for determining the best choice have been established.