Investment appraisal
Investment appraisal compares an investment with the alternative of not undertaking it. Financial appraisal normally forecasts the incremental cash flows and tests whether their value exceeds the resources committed. Net present value links this assessment to shareholder wealth, while payback, accounting rate of return and internal rate of return provide different perspectives. Strategic fit, operational capacity, financing constraints, sustainability and the reliability of forecasts also matter. A positive calculation supports a decision only to the extent that its assumptions and relevant alternatives have been examined.
Worked example
A machine costs $80,000 today and produces net cash inflows of $30,000 at each of the next four year ends. At 10%, the four-year annuity factor is 3.1699: NPV = $30,000 × 3.1699 − $80,000 = approximately $15,097. Management also checks maintenance capacity and demand assumptions before proceeding.
Common mistake
Treating a positive forecast profit as proof that a project creates value, without considering investment cost, cash timing or risk.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |