Capital investment appraisal within an organisation looks at the Essay

Capital investment appraisal within an organisation looks at the acquisition of fixed assets so as to generate wealth for the organisation - Essay Example Capital investment appraisal, which is also called capital budgeting, is the process to use funds to acquire operational assets (Khamees et al. 2010). These investment decisions obtain their guidance and source from the outcomes or results, which are provided by the source of capital investment appraisal. If the outcomes of capital investment appraisal are positive and encouraging, and these outcomes show that a particular investment, if taken, would bring wealth and additional inflows to the organisation, then investment or fund managers do not delay or waste a single minute to give a green signal for the investment project. Additionally, that investment project must ensure that after a certain number of years, the investment project would bring some additional inflows which would be more than the initial cost invested into that investment project. Four investment techniques are the different methods: Payback period, discounted payback period, net present value (NPV) and internal ra te of return (IRR). These four investment techniques are the basic tools used by the investment managers to carry out the process of investment appraisal. Each investment technique is different and is used differently by the fund or investment managers. Payback period is simply takes into account the number of years. Payback period informs that how many years a particular investment project would take to recover the initial cost of investment. The discounted payback period is a bit different to payback period. The discounted payback period uses a firm’s cost of capital for the purpose of evaluating the expected future cash flows from an investment project.... The discounted payback period uses a firm’s cost of capital for the purpose of evaluating the expected future cash flows from an investment project. In the discounted payback period, without using the cost of capital, the application of discounted payback period would not be possible and applicable for the purpose of conducting an investment appraisal. Net present value (NPV) is considered to be a more effective and reliable investment appraisal tool in comparison with other tools of investment appraisal. The main reason for its more recognition and more application among the different fund and investment managers is that net present value heavily relies on the technique of time-value of money concepts. The internal rate of return (IRR) is a discount rate. This discount rate is used by many fund and investment managers for the purpose of evaluating the future cash inflows. The only and most important function of the internal rate of return is to give a figure of cost of capita l; and this figure is used and applied on the different available cash flows to determine their present value. Capital Investment Appraisal For the financial and investment managers, the activity of capital investment appraisal brings a huge amount of responsibility for them. The capital investment appraisal requires purchasing a long term asset with a life of many years. This means, in case that fixed asset is purchased, the company becomes locked in for the duration of the asset’s life. Also, since the purchase of a fixed asset would directly increase the current level of business operations, and the contribution of the fixed asset would also increase in the activities of sales, costs and so on, it becomes necessary for the investment and fund