Investment appraisal techniques
Financial aspects of investment appraisal
Different appraisal techniques let you assess the effects an investment will have on your cashflow. You can compare the expected return to the cost of funding and to the returns offered by other potential investments.
As well as the financial impact, your calculations should also consider any indirect effects. Identifying these soft benefits is often as important as the financial evaluation and may help your decision-making.
Benefits could include:
- greater flexibility and quality of production
- faster time-to-market resulting in a bigger market share
- improved company image, better staff morale and job satisfaction, leading to greater productivity
- quicker decisions due to better availability of information
It is important to estimate the benefits of the investment in financial terms wherever possible. For example, a manufacturer of machine parts could take a general benefit such as quality and break it down with estimated savings:
- Reduced reworking means less disruption to the production process, less manufacturing down-time and fewer design changes, resulting in an overall saving of 25 per cent.
- The current warranty and service costs of £10,000 per annum are likely to be halved.
- Quality assurance staff will be reduced by one as needs for inspections are lower.
- Better quality products will increase sales by 6 per cent and will also improve the company's current position of fourth among its competitors.
Before committing to any investment, it is essential to ensure any financing you need is available - see business financing options - an overview.
There may also be other, non-financial reasons for making an investment. For example, you may need to update your equipment to improve health and safety or to meet modern standards or new legislation - see non-financial factors for investment appraisal.