Investment appraisal techniques
A number of different investment appraisal techniques exist, each emphasises a slightly different measure of the outcome. You should use the technique or techniques which most suit the needs of your specific project.
The main investment appraisal techniques include:
- accounting rate of return (compares expenditure with profit)
- payback period (assesses an investment by the period of time it would take to repay it)
- discounting cashflow (works out the present day equivalent of future cashflow)
- investment risk and sensitivity analysis (assesses the risk of an investment, including the disruption to business as usual).
Your assessment should consider all of the financial consequences of an investment - it may be cost effective to buy a more expensive machine if the running costs are going to be lower.
There may also be benefits or risks which are not immediately apparent. You should take care to include such hidden implications in your appraisal. Examples of hidden implications could be:
- better quality of end-product
- improved company image
- faster time-to-market
- improvements to the decision making process
You should also consider how the proposed new investment fits in with your overall business strategy.
Contact your local Business Gateway office.
Your local office will be able to answer your questions on this or any other business subject.