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Before any Investment appraisal:

Before we embark on the choosing of the appropriate investment appraisal method, we should first consider the following:

• does the investment fit the strategic direction of the company. We really need to understand the profile of the management whether they are risk-takers or risk-averse, profit or non-profit motivated and how’s their perception of the “full costs” of the investment,

• does the company have any budgetary constraints. Those under the capital budget should be able to sell across more easily whilst those needing additional funding will be quite difficult to get approval,

• have we consider other way(s) to improve the attractiveness of the investment by choosing the appropriate timing and on a different scale so as to reap economies of scale,

• how does the investment fit into other stakeholders of the company. This need not necessarily be the shareholders alone as the investment might impact redundancies ( employees), environment, safety and others,

• any other investment opportunities that might be missed.

Criteria of a Good Investment Appraisal Method:

To find an appropriate Investment appraisal method, we must first consider what are the criteria of a good investment appraisal method:

• it recognizes the time value of money,

• it considers the risk associated with an investment,

• it takes the full economic life of the investment into account,

• it is not an arbitrary decision rule which relies on interpretation,

• it focuses on cash flows

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