Investment Appraisal Tools

Investment is a very crucial parts in a business if they are to survive in the long-term. Investment decisions are not a simple matter of looking at an investment and saying 'Yes that looks profitable' and going ahead. Most businesses will have a choice of a range of investment projects and they need to have a basis for comparing them to evaluate which is the best.

Before making any decision in deciding any investment, the managers should estimate the investment project using investment appraisal tools. There are numbers of investment tools that the company might use in order to assess the potential risk, return, opportunity cost, payback time (period) of each investment, with the aim of better understanding about their investment. Tools that being use as the investment appraisal tools are; 

Payback period
This is the first and one of the simplest appraisal techniques. You simply need to look at the financial returns that the project is expected to generate over all the years of its life and compare these to how much it cost. You then look at how long the investment takes to payback its original cost. The faster the payback, the better.

Average rate of return
This method also looks at the returns (the net cash flows) over the years of the investment. It then works out how much the average return is over the lifetime of the project, divided by the original cost to get a percentage return. The higher the return, the better.

Discounted cash flow
This is the most sophisticated and complex of the methods as it takes into account the time value of money. In other words, it takes account of the fact that a return in several years is worth a lot less than having the same return in your hand now. Therefore future returns need to be discounted to see what they would be worth now. Once this has been done, then it is easier to evaluate what the investment may be worth.

Net Present Value
NPV is difference between the present value of the future cash flow from the investment and the amount of investment. Present value of expected cash flows is computed by discounting them at the required rate return. In addition, a positive NPV means a better return, and a negative NPV means a worse return, than the return from zero NPV.


The Merger between Vodafone and Mannessman is expected to deliver post-tax cashflow savings of approximately GBP 200m per annum ($330m) by the year ending 31 March 2002, resulting in a net present value of approximately GBP 2.1 billion ($3.5 billion), together with significant additional cashflow benefits from revenue enhancements and new products. Moreover, the Merger provides an outstanding platform for rapid growth and expansion, accelerating customer growth through acquisitions, new licenses and leadership in next generation mobile technology. such conclusion are assessed based on consumer appraisal tools. It is believed to say that a good investment managers should count and estimate the company's return on investment using the investment appraisal tools.