Page 6 - 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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