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Q. Show the investment appraisal method?
The investment appraisal method is concerned with assessing the value of future cash flows compared to the cost of investment. Since future cash flows can't be predicted with certainty managers must consider how much confidence can be placed in the results of the investment appraisal process. They must thus be concerned with the risk and uncertainty of a project. Uncertainty refers to the circumstances where probabilities cannot be assigned to future cash flows. Uncertainty can't therefore be quantified and increases with project life it is usually true to say that the more distant is a cash flow the more uncertain is its value. Risk refers to the circumstances where probabilities are able to be assigned to future cash flows for example as a result of managerial experience and judgement or scenario analysis. Where such probabilities are able to be assigned it is possible to quantify the risk associated with project variables and hence of the project as a whole.
If uncertainty and risk weren't considered in the investment appraisal process managers might make the mistake of placing too much confidence in the results of investment appraisal or else they may fail to monitor investment projects in order to ensure that expected results are in fact being achieved. Assessment of project risk is able to also indicate projects that might be rejected as being too risky compared with existing business operations or projects that might be worthy of reconsideration if ways of reducing project risk could be found in order to make project outcomes more acceptable.
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