Investment Appraisal

Why businesses invest?

Types of investments

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  • Created by: Ciara
  • Created on: 12-05-09 15:09

Why do businesses invest?

  • Businesses might want to increase market share
  • Some businesses invest in new technology to minimise costs or improve quaility
  • Business may invest in new capacity to help the business grow organically (induced) It will help reduce labour costs and improve consistency
  • May have to invest in new machinery due to wear and tear and become obsolete (autonomus)
  • To be competive within the market
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Investment Criteria

  • Return - this is found by substracting the cost of the project from the expeceted revenue.
  • Business cofidence- this is influenced by the businesses previous success in new investments that have been made, the state of the economy, the exsiting level of capacity and future order levels.
  • External factors - this can be direct or indirect.
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Payback method

The payback method refers to the amount of time it takes for a project to recover or payback the initial outlay.

The one with the shortest payback period is choosen.

Advantages

  • It is simple to use
  • This method is useful when technology changes rapidly

Disadvantages

  • Cash earned after the payback is not taken into consideration in
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