Investment Appraisal

What is it?

•A process that helps make decisions on investment choices

When would we need this?

•New products – research and development, promotion

•Expansion

•Spending

•New technology

•Advertising campaign

•Reorganisation & retraining

•New production techniques e.g. JIT & Kaizen

Revenues:

•Competitors introducing new products or reducing their prices •Tastes and fashions changing •Economic recession

Costs:

•Unexpected periods of inflation •Rising import prices

Accuracy of forecasts depends on stable economic environment

What assumptions do they depend on?

•All costs and revenues can be forecast easily and accurately into the future •Key variables e.g. interest rates will not change unexpectedly •Business is seeking maximum profits

What are the 2 factors managers need to consider?

•Total profits earned by investment •How quickly investment will recover its cost