Strategic Financial Management- Investment Appraisal_RCF,PP,DPP,TVM,ARR

1. Strateg
ic
Financi
al
Manag
ement
Investment
Appraisal ~
Introduction
Dayana Mastura Baharudin

2. Investment
decision-
making
Capital investment projects involve the outlay of large sums of
money in the expectation of benefits that may take several
years to accrue
The decision whether to proceed with a capital investment
project is normally made by a capital expenditure committee
overseeing a process that includes the following phases:
Idea creation
Screening
Financial Analysis
Review

3. Investment decision making
phases
IDEA CREATION- PROPOSALS
CAN BE STIMULATED BY A
REGULAR REVIEW OF THE
COMPANY’S COMPETITIVE
ENVIRONMENT AND CAN BE
ENCOURAGED BY INCENTIVE
SCHEMES
SCREENING - TO SCREEN OUT
UNSUITABLE PROPOSALS BY
LOOKING AT THE IMPACT OF THE
PROJECT ON STAKEHOLDERS
AND WHETHER THEY SUPPORT
THE ORGANIZATION’S STRATEGY
FINANCIAL ANALYSIS – TO
SCREEN OUT UNSUITABLE
PROPOSALS BY LOOKING AT THE
IMPACT OF THE PROJECT ON
STAKEHOLDERS
REVIEW – A POST-COMPLETION
REVIEW (OR AUDIT) AIMS TO
LEARN FROM MISTAKES THAT
HAVE ARISEN IN THE PROJECT
APPRAISAL PROCESS.

4. Relevant Cash
flows
A future
incremental
cash flow
caused by a
decision (eg
to invest in a
project)

5. Opportunity
Cost
A cost incurred from
diverting existing
resources from their
best use

6. Non-
relevant
costs
Non-cash flows – Depreciation and apportioned
overheads (ie overheads that are not directly attributed
to a project) are not cash flows
Sunk and committed costs – A cost incurred in the past
(ie sunk) or committed to, will not change whether a
project goes ahead or not and is therefore not a
relevant cash flow
Historic cost of materials - If materials that are used by
a project need to be replaced, the relevant cost of the
materials is the replacement cost of the material – ot
the price originally paid to acquie the material (ie the
historic cost. If such materials do not need to be
replaced, the relevant cost is zero

7. Non-
relevant
costs
Cost of labour – If labour used
by a project is a) idle – then the
relevant cost of using that
labour is zero
b) At full capacity, then the cost
is wages paid + contribution lost
on the work, that they have had
to stop doing
c) Only use labour cost as a
relevant cost if no indication of
capacity issues are given

8. Non-relevant
cost
Finance Cost – Any finance
cost (eg dividend payments,
interest payments) should
not be considered as a cash
flow because they are
included in the cost of
capital used to discount a
project

10. Investme
nt
appraisal
techniqu
es

13. Payback
period in
year 3

14. Time
value of
money

15. Time value
of money
continued
…….
In other words, time value of money is defined
as a concept which states that purchasing power
of money differs with the passage of time.
Normally what we do with money. We either
expend or save money. In expenditure, time
value of money is understood with inflation and
in savings, it has relevance due to interest rates.
In our daily routine, from our income, we spend,
save, borrow or invest money.

17. Discounted
cash flow
The Discounted Cash
Flow (DCF) business
valuation model is a
powerful valuation tool
grounded in a simple
concept: the value of
any given business is
equal to the sum of all
future cash flows of that
business, discounted to
reflect their value today.

19. DIScounte
d payback
period -
example

23. Advantages
and
disadvantages
of arr