Page 4 - PowerPoint Presentation

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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