Corporate finance- Appraisal of Investments

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Title : Corporate finance - Appraisal of Investments No of pages : 9

Organisations , both corporate and non-corporate bodies , in the course of their business operations apply all or some of their resources in acquiring assets to be held for capital appreciation , income generation or other purposes such as securing competitive advantages . Succinctly put , investment can be defined as assets acquisition by an enterprise for the purpose of capital appreciation and income generation '7

Investment decision is considered to be the core of organisation because the success or failure of any organisation will

depend on the quality of investment decision made by the management

Some kinds of investment decisions that can be undertaken include

Decision to replace an existing asset that has outlived its economic life with a new asset of the same type

Replacement of an active asset with another asset that is considered to be more operationally efficient Replacement and modernisation investment is required when there is need to change outdated and obsolete equipment for more economic operations

Expansionary decision , i .e . decision to expand the existing production facilities and

Decision to introduce another product line (diversification

Expansion of existing business may take the form of adding capacity to the existing product lines in to increase the earning ability of the organisation

Expansion or improvement proposals relate to existing products , and are intended to increase production , service and distribution capacity , to improve product quality , or to maintain and improve the firm 's position

In choosing an option of investment to recommend to management of an organisation or firm , the following key steps of investment decisions are relevant

Determination of the budget - In theory , all capital projects that are sufficiently profitable should be able to attract the required funds . In practice however , the investment decision-making body is a sub-unit of a group , then budget may be more or less rigidly imposed on it from above Such budget therefore becomes an important factor

Search for and development of projects - Generating investment ideas involves considerable effort , time and personal on the part of the proposer . Any manager or team leader who has experienced the frustration of having an investment proposal dismissed or an accepted proposal fails is likely to develop an inbuilt resistance to creating further proposals unless the organisation culture and rewards are conducive to such activity

Development of proposal - At this early stage , a preliminary screening of all investment ideas is usually conducted . It is neither feasible nor desirable to conduct a full-scale evaluation of each investment idea The screening process is an important means of filtering out projects not thought worthy of further investigation . Ideas may not fit with strategic thinking , or fall outside business units designated for growth or maintenance . Preliminary screening proposals address such question as

Is the investment opportunity compatible with corporate strategy ? Does it fall within a section of the business designated for growth maintenance or divestment

Are the resources required by the project available (e .g . expertise finance , etc

Is the idea technically feasible...