Investment appraisal process

NotesVideoQuizPaper examCBE

Investment appraisal process

The nature of investment decisions and the appraisal process

Ok this is a bit dull, and a bit obvious, but hey not everything in life can be as cool as cows.. so just learn them and stop moaning, you big fat money pants

Key stages:

  1. Identifying investment opportunities

    From an analysis of strategic choices, analysis of the business environment, research and development, or legal requirements. 

    The key requirement is that investment proposals should support the achievement of organisational objectives.

  2. Screening investment proposals

    Companies need to choose between competing investment proposals and select those with the best strategic fit and the most appropriate use of economic resources.

  3. Analysing and evaluating investment proposals

    This is the stage where investment appraisal plays a key role, indicating for example which investment proposals have the highest net present value.

  4. Approving investment proposals

    Very large proposals may require approval by the board of directors, while smaller proposals may be approved at divisional level

  5. Implementing, monitoring and reviewing investments

    The time required to implement the investment proposal or project will depend on its size and complexity. 

    Following implementation, the investment project must be monitored to ensure that the expected results are being achieved and the performance is as expected.

    The whole of the investment decision-making process should also be reviewed in order to facilitate organisational learning and to improve future investment decisions.

A benefits realisation review

takes place after the product has been delivered.

It revisits the business case to see if the costs predicted at the initiation of the project were accurate and that the predicted benefits have actually accrued.

What might happen if a return on investment project decreases?

  • More projects will be accepted if the rate is relaxed.

  • The share price may decline if the directors do not appear confident.

  • The economy may recover before the projects’ outcomes are determined.

NotesVideoQuizPaper examCBE