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2015 | Book

Capital Budgeting and Investment Decisions Read chapter Read first chapter

Investment Appraisal

Methods and Models

Authors: Uwe Götze, Deryl Northcott, Peter Schuster

Publisher: Springer Berlin Heidelberg

Book Series : Springer Texts in Business and Economics

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book provides an introduction to investment appraisal and presents a range of methods and models, some of which are not widely known, or at least not well covered by other textbooks. Each approach is thoroughly described, evaluated and illustrated using examples, with its assumptions and limitations analyzed in terms of their implications for investment decision-making practice. Investment decisions are of vital importance to all companies. Getting these decisions right is crucial but, due to a complex and dynamic business environment, this remains a challenging management task. Effective appraisal methods are valuable tools in supporting investment decision-making. As organisations continue to seek a competitive edge, it is increasingly important that management accountants and strategic decision-makers have a sound knowledge of these tools.

Table of Contents

Frontmatter

Introduction

Frontmatter
1. Capital Budgeting and Investment Decisions
Abstract
Investment decisions are of vital importance to all companies, since they determine both their potential to succeed and their ultimate cost structure. Investments usually entail high initial cash outflows and thus tie up substantial funds. Sound investment decisions are important, therefore. Yet, due to a highly complex and rapidly changing business environment they remain a challenging management task. Effective appraisal methods are valuable tools to support investment decisions. The following chapter explains characteristics of investment projects and discusses investment planning, provides an overview of concepts and methods and the didactical approach of this book. The decision models are then used throughout the book.
Uwe Götze, Deryl Northcott, Peter Schuster

Basic Methods of Investment Appraisal

Frontmatter
2. Static Methods
Abstract
This chapter considers simple ‘static’ analysis methods that assess the absolute and relative profitability of an investment for a time span of one (average) period.
These methods focus on a single financial measure, and other target measures are ignored. Target measures analysed and compared are costs, profits, average rates of return and the static payback periods of investment projects.
Uwe Götze, Deryl Northcott, Peter Schuster
3. Discounted Cash Flow Methods
Abstract
The discounted cash flow methods described in this chapter are classified as ‘dynamic’ investment appraisal methods, which, unlike the static methods described in Chap. 2, explicitly consider more than one time period and acknowledge the time value of money. Investment projects can be described as streams of (expected) cash inflows and outflows over the whole course of their economic life, i.e. over different time periods. Methods described and discussed in this chapter are the net present value method, the annuity method, the internal rate of return method and the dynamic payback period method. All of them are subject to a set of assumptions that are also discussed in this part.
Uwe Götze, Deryl Northcott, Peter Schuster

Advanced Methods and Applications of Investment Appraisal

Frontmatter
4. Compounded Cash Flow Methods
Abstract
This chapter describes methods that do not assume a perfect capital market—i.e. the following methods use differing debt and credit interest rates instead of a uniform discount rate: the compound value method, the critical debt interest rate method and the visualisation of financial implication (VoFI) method. As in the previous chapters the methods are described including a discussion of their assumptions and their applicability.
Uwe Götze, Deryl Northcott, Peter Schuster
5. Selected Further Applications of Investment Appraisal Methods
Abstract
This chapter examines some further applications of the investment appraisal methods already discussed: the inclusion of taxes in investment appraisals; the assessment of foreign investments; and the use of selected investment appraisal methods for determining optimum economic lives, replacement times and investment timing (under the assumption of certainty). All these applications require specialised procedures described in the chapter. Optimum economic life decisions are important and different target measures, points in time and the number and type of subsequent projects have to be considered. The use of different investment appraisal methods for this decision problem is shown in this chapter illustrated by a number of examples
Uwe Götze, Deryl Northcott, Peter Schuster

Multi-Criteria Methods and Simultaneous Decision-Making

Frontmatter
6. Multi-criteria Methods
Abstract
For many investment decisions, the decision-maker wishes to pursue several targets, rather than a single target as the earlier chapters have assumed. Such a decision-making problem is typical in strategic investment decision-making as, for example, when installing a new plant in a new location, using new technology and/or manufacturing a new product. Non-monetary measures have to be considered and a number of complex alternatives need to be analysed. This chapter describes a number of multi-criteria methods, such as: the utility value analysis, the analytic hierarchy process, the multi-attribute utility theory and PROMETHEE.
Uwe Götze, Deryl Northcott, Peter Schuster
7. Simultaneous Decision-Making Models
Abstract
Decisions about investment programmes often involve simultaneous choices about types and numbers of investment projects. Additionally, models used for simultaneous decision-making might need to accommodate choices within a range of company areas such as financing, production, sales, human resources and tax policy. In this chapter, the finance and production areas—because of their relevance and close connections with investment decisions—are selected to illustrate ways of supporting investment decision-making in a broader sense than has been discussed previously. In the sections of this chapter some models are presented in detail, their practical relevance is discussed, and problems with their practical application are analysed. A static and two multi-tier models of simultaneous investment and financing/production decisions are thoroughly described in this chapter, illustrated by examples.
Uwe Götze, Deryl Northcott, Peter Schuster

Methods and Models that Incorporate Uncertainty

Frontmatter
8. Methods and Models for Appraising Investment Projects Under Uncertainty
Abstract
Investment decision-making under uncertainty requires a lot of additional considerations. This chapter picks this up and describes decision theory, the risk-adjusted analysis, the sensitivity analysis, the decision-tree method and options pricing models. All these cover a wider range within uncertain environment situations for single investment projects.
Uwe Götze, Deryl Northcott, Peter Schuster
9. Analysing Investment Programmes Under Uncertainty
Abstract
Uncertainty plays a significant role in all investment decision-making. In the previous chapter the analysis of single investment projects under conditions of uncertainty was discussed. This chapter now expands to methods and models for analysing investment programmes in such environments. When investment programmes are planned, often many (or even an infinite number of) investment alternatives exist, considerably complicating analytical models and/or evaluations that attempt to take account of uncertainty. Limitations on the ranges of uncertain conditions or investment alternatives then become necessary. The chapter includes a description of portfolio selection and of flexible planning.
Uwe Götze, Deryl Northcott, Peter Schuster
Backmatter
Metadata
Title
Investment Appraisal
Authors
Uwe Götze
Deryl Northcott
Peter Schuster
Copyright Year
2015
Publisher
Springer Berlin Heidelberg
Electronic ISBN
978-3-662-45851-8
Print ISBN
978-3-662-45850-1
DOI
https://doi.org/10.1007/978-3-662-45851-8