Learning Objectives:
After studying this topic, the reader should be able to know about:
- Investment evaluation techniques
- Capital investment techniques,
- Other variables that affect investment appraisal techniques
- Summary and conclusions
Revision Questions
Introduction
Investment contemplation is a long-term consideration and decision where expenditure and investment options are balanced in the expectation that investment now will generate extra returns in the future. There are similarities between short-run and long-run decision-making, for example, the option between alternative, the need to consider future costs and income and the significance of incremental alteration in costs and incomes, but there is an added obligation for investment decision, since the added worth of money invested must be measured (Lucey, 1996).
The purpose of the topic is to examine the wide range of criteria for evaluating the usefulness of investment evaluation method and describe the ways inflation and taxation affect project appraisal.
The investment evaluation methods could not give a quantitative analysis which gives a firm foundation from which a considered decision can be made, based on three major factors (Pandey, 2007) Viz:
- The shareholder’s confidence in the prospect of the enterprise. The belief would be based on forecasts of internal and external factors including costs, revenues, inflation and interest rates, taxation and numerous other factors.
- The alternatives available in which to invest. The various methods to appraise competing investments would be adequately covered in this study.
- The investor's attitude to risk. Because investment decisions are often on a large-scale investigation of the investor's approach to threat and the project's uncertainty are critical factors in an investment decision.
In order to handle these decisions, (Pandey, 2007) stated that top management of firms has to make an assessment of the size of the outflows and inflows of funds, and the effects of such decision.
Although the absolute result would be made by management the analyst assesses the alternatives available, analyzes the data using the most appropriate techniques and present the results of the exercise to management in the hope that better decision is made (Lucey, 1996).
The rest of the paper is structured as follows:
- Investment valuation techniques
- Capital investment techniques,
iii Other variables that affect investment evaluation methods
- Summary and conclusion.
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