• Conducting investment appraisal: selection of appropriate methods, calculation and interpretation of findings.
• Investment criteria.
• Assessing the risks and uncertainties of investment decisions.
• Evaluating quantitative and qualitative influences on investment decisions.
Candidates should understand the reasons why businesses invest and the ways in which investment can help businesses to reach functional objectives. Quantitative measures of investment should include: payback, average rate of return, and net present value.
Investment Criteria – Criteria set by businesses to assess if a project is worth investment.
Quantitative factors – Those that are measurable and can be calculated to give comparable results on potential investments.
Qualitative factors – Issues surrounding an investment decision that are not based in financial.information but are based on subjective data (opinions, feelings etc); they often involve consideration of factors such as environmental concerns or impacton employee morale.
It is likely that businesses will set predetermined minimum criteria that any potential investment project must pass before it is even considered. This is because the methods used to calculate potential return can often give conflicting results. These processes help a business to rate and rank investment proposals and select the overall best option available, or even reject all projects put forward if none meet the criteria.
A business will take into account qualitative data as well. Profitable investments may be rejected in favour of less profitable ones for a variety of reasons: