Investment Appraisal as a Tool for Management Decision Making

Investment Appraisal as a Tool for Management Decision Making

 

            First and foremost let us identify what is Investment Appraisal and why it is an important tool for a management decision making process. We will also get into a bit of technical and literal advantages when it is used in management decision.

         Investment Appraisal is a means where assessment of products and services takes place whether or not it is in favor of the company before purchase. It is also a means whether the project is worthwhile or not. So whatever investment the company must undertake the management decision should take place and there are many things to consider before the actual expenditure. For example the company has an initial ,000 Capital Investment that is not been used, they may simply put the money in the bank and it will serve them well since the bank will give them a steady secured interest of about 5% monthly. It is easy to say that it’s alright put it there since it is safe.

       But what if they can choose to invest the money in a Capital Stock market where they can earn as much as 10 percent to 20 percent per month but risk may involve the rise and fall of stocks. Will the management be willing to put their money in such investment opportunity? Management should decide.

      If they have another option of putting the money in a new business venture let’s say putting up a new business or putting the money in a partnership of a store outlet that is newly established. This investment may involve a lot of risk since this store is new and their customers are not yet stable, added to it is the products they are going to sell may not be familiar with the customers or you may wonder if the place is highly accessible. But they can give you as much as 50% Interest rate of their income since you are a business partner. Investing in such a new business venture takes a lot of risk. So the question is will the management be involved in such investment? Among the three options what would they choose? To give you a clearer view let us summarize the process so you can choose between the following;

·         Investment 1.  Bank Investment        =     5% Interest rate                =  0% risk

·         Investment 2.  Capital Stock Market  =    10 to 20% Interest rate     =  20% risk

·         Investment 3.  Partnership                 =    as much as 50% Interest = 50% risk

     Management would choose where are we going to put our money? Or should I seek for more investment? As you can see management decision is highly critical and prerogative since it involved the whole organization and its entirety. Another option they can choose is to divide the money to invest in two or three of the following or simply do not invest at all. The decision should be properly weigh down due to its complexity but since the investment has not been concluded management would simply put their money in the bank for safekeeping. But if management has found a better opportunity they may consider transferring their money to such investment.

      Talking about asset or material acquisition, management investment appraisal should be at hand. Usually investing in a fixed asset involved learning such purchase or the money would be wasted. For example a company must buy a land for building a factory. The parcel of land maybe low priced but the accessibility makes it difficult to employees. Will the management decide to buy or not? It is up to them, or will they look for a high priced piece of land that is at the center of highly commercialized area and high accessibility traffic footed community? What if they have a limited budget? These conclusive questions do not require you to look for answers but to put yourself in the shoe of the management to make such decision.  To help you decide to come up with such conclusion you may need to seek the help of the organization or simply decide it yourself. The following should give you a helpful guide in Investment Appraisal.

·         Investment should build a valuable profit today and in the future

·         You must understand that investment requires time to get the actual return

·         Allocate the financial capability of the company before investing

·         Make use of your investment to its maximum capacity ex. purchases of machineries, computers capital stock etc.

·         Properly assess products and services before investing. This includes taking advantage of their promotion, warranty or guarantee or other stuff

      All in all Investment Appraisal is a great tool for management in decision making it can involve the personality and the status of the company in the eye of their employees and customers. Generally a good decision makes a company really progressive, or on the other hand management who cannot make such decision is mostly companies who are weak and who are left behind.

     

 

       

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