Long-Term Decision Making Investment Appraisal

Long-Term Decision Making
Investment Appraisal


1

, Learning Objectives
• To consider the characteristics of long-term investment projects
• To examine the process of long-term investment decision making
• To apply various investment appraisal techniques to evaluate investment
projects
• To consider the advantages and disadvantages of these investment apprai
techniques




2

, Characteristics of
Long-Term Investment Decisions
• Commitment of a large amount of company resources
• Links to strategic and tactical business decisions
• May have a significant impact on future business performance
• Extremely expensive and difficult and expensive to reverse a long-te
investment decision
• The risk and uncertainty of undertaking a long-term investment can
high


3

, Process in Appraising
Long-Term Investment Projects
1) Initial Investigation
To determine if the investment proposal is a feasible project
(marketing; technical; legal and economic feasibility studies)
Factors to consider:
o resources required
o technical and commercial feasibility
o risks of the project
o how the project supports the firm’s strategic objectives


2) Detailed Evaluation
Forecast the expected cash flows from the project
Evaluate these using investment appraisal techniques (E.g. PBP, ARR,NPV, IRR)
May also use other techniques to assess the degree of risk involved in the project
(E.g. scenario and sensitivity analysis)
Also consider non-financial factors