Page 83 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Overview

• Capital investment appraisals are long-term decisions, where it will take
several years to earn a return on the capital investment made.

• Here, it is important to take cognisance of the similarities and
differences between capital investment appraisals and business
valuations. When assessing a proposed capital investment using
discounted cash flow methods (e.g. projecting cash flows and
calculating a net present value or internal rate of return), a capital
investment appraisal displays many similarities to a business valuation

(using, for example, an enterprise discounted cash flow model, based on
free cash flow).

• From your prior knowledge, you should recall that a capital investment
appraisal frequently assesses a project over a fixed term (for example 5
years), where end-of-period cash flows should be accounted for (for
example the re-sell value of a machine). In contrast, a business
valuation frequently accounts for a continuing value using, for example,
the Gordon Growth Model.

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