There are six projects which “Cheltenham Races” LTD aims to undertake and for this purpose the company is using investment appraisal methods. Investment appraisal procedure is the technique of evaluation of different projects to choose the best projects which maximise the company’s profit.
THE INVESTMENT DECISION MAKING PROCESS:
There are number of stages to be followed in the investment decision making process.
* Origination of proposals;
It is very important at this stage that organisation’s have free friendly atmosphere for the staff/participants in decision making, as new ideas are expected to develop at this stage, thus rejecting some alternatives projects early.
* Project screening;
At this stage qualitative factors should be considered before undertaking any financial measures. Such evaluation will include asking questions whether the project fits with the long-term objectives of the organisation’s .Only those projects will be further evaluated which passed this initial screening.
* Analysis and acceptance;
At this stage, the organisation undertakes financial analysis using its preferred method of investment appraisal.
* Monitoring and review;
Once the decision made and project is implemented, then it is necessary to ensure that the expected benefits are obtained and that authorised capital spending was not exceeded.
Investment appraisal method;
There are four methods which we can use to evaluate the investments.
1) The Payback period
2) The accounting rate of return
3) The net present value method
4) The internal rate of return method
A. The Payback period;
The payback period is the number of years it takes to recover its initial investment. This method assists with the project risk and liquidity. The projects with the less payback period consider less risky than the projects with greater payback period.
Payback period = initial investment...