《《lecture 9 - capital investment》.ppt

PGBM12 Accounting Financial Management Lecture 9 Long-Term Decision Making Learning Objectives Characteristics of long-term decision making Processes of decision making Major techniques for decision making Advantages and disadvantages of these methods Other factors for decision making Characteristics Commitment of a large amount of company resources Links to strategic and tactical business decisions Extremely expensive and difficult to reverse a long term investment decision The risk and uncertainty of undertaking a long-term investment can be high Processes Initial investigation To determine if the investment proposal is a feasible project Factors to consider: resources required, technical and commercial feasibility, risks of the project, and how the project matches the firm’s strategic objectives Detailed evaluation To forecast the expected cash flows from the project, by using NPV, IRR or other relevant techniques Simulation and sensitivity analysis may be used to assess the degree of risk involved in the project Sources of finance and non-financial factors need to be detailed Processes Authorisation Ranking of proposals in order of priority The proposal meets the profitability criteria and is compatible with the overall strategy of the business The decision should be made by senior management, or the board of directors if necessary Project implementation The appointment of a project manager or assignment of responsibility The required resources are allocated and the specified targets are set to be achieved Processes Monitoring the project Feedforward principles employed to reassess the expected costs and benefits The corrective action taken to rectify any adverse variance Post-completion audit To monitor and report on the progress and to identify aspects which could be improved for future project planning Methods of Investment Appraisal Payback period (PP) The length of time: cash proceeds recover the initial capital expenditure Accounti