Essay on Capital Investment Appraisals

Published: 2021/11/05
Number of words: 1144

Introduction

The Capital Investment Appraisal is the process whereby the specific sum of money known as capital is being budgeted towards short-term or long-term investment (Harris & El-Massri, 2011). This deals with planning for the right business and project that the organization can invest in in order to enhance the attainment of corporate goals. There are various budget tools that are used by businesses or organizations to analyse and forecast the expected returns for various investments. Sangster, (1993) aanalysing capital investments can assess various kinds of investments made ranging from fixed assets like lands, machinery, estate properties, research, among other fixed assets. The use of capital analysis techniques will examine the benefits of long-term investment assets from one year and beyond. Techniques of capital investment appraisal include payback period, internal rate of return, among others. Capital investment appraisal techniques are employed to understand and measure the business’s capital investment over the investment period. The organization needs to generate enough return in order to avoid losses in the future because it involves a huge sum of money. The capital investment appraisal techniques can be used cutting across varieties of techniques like net present value, internal rate of return, modified internal rate of return, accounting rate of return, and more.

Question “d”

The internal rate of return is a capital investment analysis that can be used to conduct investment appraisals in Chamberlain PLC. This is a technique that uses a discount rate to measure the net present value. Hartman & Schafrick, (2004) this technique is useful in measuring capital investment efficiency, to analyze and understand the efficiency of the investment. This technique helps to identify the cost of investment as compared to the internal rate of the return value. When the expected cost of the capital investment of Chamberlain PLC is more than the internal rate of the return value, the asset or investment is expected to be rejected. When the expected cost is lower than the internal rate of the return value, the investment project is likely to be good and accepted. The internal rate of return value examines the time value of the money above the project life schedule to rank the project and identify the world discount rate. The technique is used to rank the project investment value against other projects. This will identify the highest profitable index to the lowest profitability index in order to examine and implement the highly profitable index project. Sangster, (1993) internal rate of return is very useful in measuring the exact benefit of the project or asset, and investment over the expected duration of the investment. This technique is very helpful in comparing the value of different investments for a project in order to identify the most beneficial project for investment. Chamberlain PLC can use the internal rate of return technique to examine whether the project and investment are worthwhile. The technique will show whether there are losses or enough benefits from the investment made on the project.

Need an essay assistance?
Our professional writers are here to help you.
Place an order

Question “e”

Payback method of investment appraisal a simple method that focuses on cash flows and the various activities relating to the accumulative flow of cash throughout the investment period till the original investment cash has been received from the investment (Lefley, 1996). The method uses simple and easy calculations which can be comprehended easily. The net cash flow for each period (inflow and outflow of cash) for Chamberlain PLC is monitored per year, looking at the cash flow per year, payback was made in 4 years and 4 and half months. Chamberlain PLC can utilize the payback method to examine the rate of return, speed of return, and the flow of cash during the investment. The technique can easily compare different investment projects and ascertain the most beneficial project. The payback method will identify the projects with shorter pay-back duration, projects with fast payback time will be considered than projects without a short payback period. The time to recoup the original investment should be immediate, there will be positive accumulation cash flow after recouping the original investment. How long during the 6 years for the payback to be received will be examined by the payback method of investment appraisal. In calculation, the notice is assuming the cash flow occurs each year and from Chamberlain PLC, payback of the investment amount will arise by 6 years.

Limitations

Payback method of investment appraisal can neglect continuous flow of cash after payback is received, this means the technique does not necessarily run across all the investment projects (Yard, 2000). The most important aspect of this method is getting the actual investment return. The method does not consider the time value of the money invested but focuses more on the return value of the investment. The method is mostly limited to short-term activities, the interest in long-term thinking is limited. The payback method does not focus exactly on the qualitative aspect of the investment project and goals, it hardly creates a decision for the investment.

Worry about your grades?
See how we can help you with our essay writing service.
LEARN MORE

Conclusion

Capital Investment Appraisal can be used by Chamberlain PLC to invest the initial investment in plant and equipment for the specified duration. The organization is able to utilize the various budget tools to forecast returns of the investment. There are a variety of techniques to utilize during the investment period, the net present value can be used to appraise the investment in plant and equipment, this uses a discounted cash flow value in order to examine the value of the project. The internal rate of return technique is able to examine the performance of the investment. This technique will help in analyzing the expected returns and the benefits of the investment during the long-run period. The calculation of the internal rate of return will examine the cost and the expected return of the investment, using a discount calculation rate.

The payback method is also used to forecast the expected returns and management of the investment project till there is a recoup of the actual investment sum. This method can examine the return rate, the speed of return and identify the most beneficial project for investment in the business. The limitation is how the payback method more focused on short-term decisions. The method focuses mostly on the recoupment of investment amount and does not regards the time value of the investment.

References

Harris, E. P., & El-Massri, M. (2011). Capital investment appraisal. In Review of management accounting research, 343-377.

Hartman, J. C., & Schafrick, I. C. (2004). The relevant internal rate of return. The Engineering Economist, 49(2), 139-158.

Lefley, F. (1996). The payback method of investment appraisal: A review and synthesis. International Journal of Production Economics, 44(3), 207-224.

Sangster, A. (1993). Capital investment appraisal techniques: a survey of current usage. Journal of Business Finance & Accounting, 20(3), 307-332.

Yard, S. (2000). Developments of the payback method. International journal of production economics, 67(2), 155-167.

Cite this page

Choose cite format:
APA
MLA
Harvard
Vancouver
Chicago
ASA
IEEE
AMA
Copy
Copy
Copy
Copy
Copy
Copy
Copy
Copy
Online Chat WhatsApp Messenger Email
+44 800 520 0055