Investment appraisal techniques
As defined by Cistelecan, L. (2002) investment is an “expenditure made now in order to obtain a successful future, making gains in the future”. Investment is an essential vital issue for companies, because it can ensure the growth and the development of the companies, and without it companies can’t survive in the competitive markets. (Katalininc, B. 2009)
There are two types of investment as stated by Virlics, A. (2013). These types are fix investment and monetary investments. Fix investments are tangible assets, such as buildings, machinery or a plant. On the other hand, monetary investments are stocks and bonds.
On another point of view and as stated by Götze, U., Northcott, D. & Schuster, P. (2008), investment can be categorized by the cause of the investment as the following:
Maintenance or repairmen.
Change investment (e.g. rationalization, diversification).
Making the right decision to invest or not is not a simple process. Without a sound and clear image of the future of the opportunities, companies may go on bankruptcy. Another point, a lack of proper information about the investment may lead to wrong decisions, and therefore a well-defined method of investment appraisal is required.
The need for investment appraisal techniques in the process of decision making is justified by Katalinic, B. (2009) as the following:
New opportunities for the developing and the improvement of the company may be provided by a full analysis of the investment.
Investment is associated with the reallocation of resources and cash, which makes a careful decision and a comprehensive understanding of the investment an important issue.
When a company invests, material, human and financial resources are consumed.
The economic and financial environment involved with the investment is too complex and need a specified procedure or method to reduce the uncertainty about the investment.
A well-understood investment decision will raise the probability of success.
The decision to invest depends on the investor’s expectation and his past profit experience. When a business man is willing to make an investment, he considers the expected revenue, the expected risk and the cost of finance of several investment opportunities. Then he decide to invest in a project only if the expected profit is higher than the cost of finance by and this difference is enough to cover the risk. (Virlics, A. 2009)
2. Investment Appraisal Techniques
2.1. Discounted Cash Flow Methods
These methods describe the investment projects by using the cash flow (inflow and outflow) over the life time of the project. In order to compare the cash flow in different period of time, a concept of Time Value of Money is used in these methods. By this principle all cash flow are converted into equal values at the...