Investment appraisal Flashcards
What is investment appraisal?
Investment appraisal is a management decision-making technique or tool.
When is investment appraisal used?
It is used when management is proposing to send money on fixed assets or projects- this is regarded as capital expenditure.
Basically, investment appraisal is a process a business will go through before deciding on major capital investments. Alternative options on projects will be compared to ascertain the best decision for future investments. The business will compare the initial investment and the prospective returns it hopes to achieve on investment.
What is investment appraisal sometimes referred to?
Investment appraisal is sometimes referred to as project appraisal.
When using investment appraisal there may be relationships between competing projects. What are these different projects called?
Mutually exclusive projects.
Independent projects.
Dependent projects.
What is mutually exclusive projects?
The decision to adopt one of two or more competing options cancels out the other projects, for example a construction of a power station requires a decision on whether to build one powered by nuclear fuel or fossil fuel.
What is independent projects?
From a given range of alternatives the decision-make may choose any single project, a combination of projects or all of the projects. All the projects are independent of each other.
What is dependent projects?
With dependent projects, the choice of one project may mean changes or alterations to other aspects of the business, for example he purchase of a new factory machinery may require a major alteration to the layout of a factory.
