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Investment appraisal is used to scrutinize certain factors such as the initial cost, the expected returns per annum, the timing - the number of years of returns and the risks involved to identify investment opportunities UK. It involves three ways - payback (or how much one gets for the initial expenditures), the avg. rate of return and the net present value that takes into account the time value of money, which recognizes the money earned one year is not equivalent to the rate earned in 5 years.
The investment appraisal includes the calculation for monthly earning which is derived from the division of income required by the monthly contribution. It provides easy to calculate, easy to comprehend and relevant information regarding the cash flow.
The drawback is that it ignores the amount gained after the payback and it does not calculate the future value of money, which mostly provides a short term analysis.
In a business enterprise, the decision regarding investment opportunities UK include factors like
1. Buying equipments (which can nearly be used or be replaced after some time, where one has to find if the older items are more expensive to manage).
2. The firm can spend on buying a new machine that can be of specific brand or performance where the decision-makers need to consider the economic difference between the competing offers made by the providers.
3. Investment appraisal can be made towards buying equipment or leasing which may involve the difference in economics.
4. The company may spend towards maintenance or hiring for some work where the management may decline upon hiring in-house staff or contacting outside contractors, and in such conditions, the economic difference has to be calculated.
5. The returns from such projects can fluctuate. The manager may use the average return to get accurate measures where the averages total return throughout the project is calculated. The average annual return can be determined as the percentage concerning the value of the initial funds. Such evaluations help in decision making where the owners determine the financial impact and calculate the indirect effects.
Financial appraisals can help to assess the impact of deal on cash flow to get the expected returns in comparison to the cost of funding and returns offered by the potential expenditures. It offers greater flexibility where one can improve the quality of product and deliver faster. It improves the company’s image through quicker productivity through the availability of information.
Reduced reworking may be required in such conditions, which means, less disruption to the product, resulting in higher savings where the warranty and service costs should be condensed. The quality assurance staff can be reduced and higher quality products can increase sales.
In terms of strategic planning, it helps the management to determine the minimum needed to maintain the existing machinery and achieve output without making huge expenses on machines through outsourcing or by getting products from a supplier. It also helps in designing alternative flexible strategies even after making huge expenses.
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