INTRODUCTION
Companies in today’s world are always looking at ways to develop and change. This compels the senior management to be counter a variety of different proposals ranging from expansion decisions to assets acquisition decisions, not only this but certain contracts for services are also long term investments if they offer cash flows beyond one year. Choosing between investment appraisal decisions is of critical importance as the companies only have limited resources available with investors (shareholders and banks) only willing to offer limited amounts of finance.
The investment appraisal decisions are critical because such decisions impact availability of resources and shareholder’s wealth. This is also because such decisions involve an element of risk as the expected future cash flows associated with projects / investments are always uncertain.
Investment appraisal decisions effect on effectiveness and efficiency of the operations and profitability of the company in periods beyond current year, secondly one of the major concepts in modern financial managements associates the market value of a company as equal to the discounted value of the future cash flows it expects to yield from its investments in projects.
(Richard and Stewart 2007)The investors of a company prefer to get rich not poor, this is why they expect from the managers of the company to invest in every project that is expected to pay more than what it is actually going to cost. (Richard and Stewart 2007)
Drury (2000) stated, “ The theory of capital budgeting reconciles the goals of survival and profitability by assuming that management takes as its goal the maximization of the market value of the shareholders’ wealth via the maximization of the market value of ordinary share”.
References:
Idowu, S. (2000) Capital investment appraisal. Retrieved January 27, 2010,
from http://www.accaglobal.com/students/student_accountant/archive/2000/8/39869
Plant, P. (2000) The...