INVESTMENT APPRAISAL AS A TOOL FOR MANAGEMENT DECISION MAKING: RESEARCH PROPOSAL
Investment appraisal is the most important decision of any business organization. It refers to the planning process that an organization conducts to determine whether their long term-investments such as research and development, new machinery, new products, new buildings and innovations are beneficial to the company or not in terms of yields and returns over a period of time. (Wikipedia, n.d., Investment Accountants, n.d.) It is a critical aspect of any financial management decision-making process because it involves a lot of money. Investment proposal is conducted to attract money into the organization and is basically a function of the financial manager.
Management commits a large amount of financial resources in investment appraisals because it is linked to tactical and strategic business decisions. Although project cost and benefits are hard to predict, and the uncertainty and risk in undertaking medium to long-term investment is high, investment decisions are aimed to achieve long term objectives which is the maximization of shareholders’ wealth. Careful and critical consideration is important in conducting investment appraisals because not only it is expensive it is also very costly, it also very difficult to reverse investment decisions that have gone awry. There are key considerations in investment decisions. These are cost, availability of funds, return on investment, the length of payback time, projected profits and if whether the financial resources used for the particular investment decision can be used somewhere else that yields better returns. (The Times 100, n.d.)
Investment appraisal is a continuous process. Many businesses approaching investment appraisal as a one stop shop have failed. As a continuous agenda, it follows some stages: search for investment opportunities, enquiry into the possible outcomes, identification of the best possible outcomes, capital budgeting (appraisal tools used to decide to continue investment or not), selection of the most viable project, implementation of the selected project, monitoring feedback and correction. (Investment Accountants, n.d.)
Capital budgeting is an important stage in investment appraisal. In this stage, financial managers use capital budgeting appraisal tools to determine if the project is worthwhile and to decide whether to continue the investment or not. The techniques most commonly used are Payback Period, Discounted Payback Period, Accounting Rate of Return (ARR), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), and Adjusted Present Value (APV). (Ansar, 2009)
Review of Related Literature and Studies
Grigalunas, Chang and Yu, 2002 conducted an illustrative case study on investment appraisal of container port. Container port development is a risky development project as it involves greater financial, economic, and environmental risks. To review the risks involved the researcher used the following methods: net present value, extensive sensitivity analyses, Monte Carlo analysis and a dynamic discrete-event model. The latter is used to determine feasibility of the port plan and its projected operations. There are four specific risked that are identified and considered in this study. These are start-up volume of moves, growth rate of moves, costs, and efficiency of yard operations. The study found out that the most critical factor that determines financial success of a proposed container port is start-up volume and growth rate.
Akalu and Turner (2001) conducted a case study of capital budgeting strategies of four companies representing different industries. The results showed that the four companies used a decentralized strategy for project decision-making. The firms also utilized a combination of tools such as discounted cash flow (DCF) with their own “value management tool”. They also modified the DCF tool to adopt to their needs. Although the firms do not follow the same technique from the start of the project up to completion, this new trend signify that there is a change or shift in the methods of capital budgeting.
Statement of the Problem
This study will describe a firm’s investment appraisal technique over a period of time. This study will also identify and describe specific investment appraisal techniques used by the firm. Finally this study will also determine whether a specific investment appraisal technique is effective for that particular firm of not.
A case study method is the most appropriate methodology for the review of investment appraisal techniques. The data gathering tools that will be employed in this study are interviews, secondary data gathering and direct observation and others as deemed necessary.
Akalu, MM and Turner JR, 2001. The Practice of Investment Appraisal. Abstract only. Available at:< http://papers.ssrn.com/sol3/papers.cfm?abstract_id=370935> [Accessed 26 May 2011].
Ansar, 2009. What are Investment Appraisal Techniques. [online] Available at:< http://www.helium.com/items/1507869-investment-appraisal-techniques-npv-apv-payback-arr-irr> [Accessed 26 May 2011]
Cook, Mark. Approaches to Investment Appraisal. [online] Available at< http://findarticles.com/p/articles/mi_qa3889/is_200204/ai_n9076100/> [Accessed 26 May 2011].
Grigalunas, TA., Chang Y-T., Luo, M., 2002. Containerport Investment Appraisal And Risk Analysis: Illustrative Case Study. [online] Available at:< http://trid.trb.org/view.aspx?id=723687> [Accessed 26 May 2011].
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Plant, P., 2000. Capital Investment Appraisal Process. [online] Available at:< http://www2.accaglobal.com/students/student_accountant/archive/2000/8/15148> [Accessed 26 May 2011].
The Times 100, n.d. Investment Appraisal. [online] Available at:< http://www.thetimes100.co.uk/theory/theory–investment-appraisal–380.php> [Accessed 26 May 2011].
Wikipedia, n.d. Capital Budgeting. [online] Available at:<http://en.wikipedia.org/wiki/Capital_budgeting> [Accessed 26 May 2011].