This report is written with an aim of seeking board of directors’ direction on the basis on which they will take a decision on a major investment in capital equipment proposed by the manufacturing division of the company. Capital investment decisions are critical because they involve discharging high amount of funds for a considerably long period. This report appreciates that the capital investment funds should be allotted to the projects in the most efficient way to ensure that the company derives the best possible returns by analyzing the level of the expected returns with the estimated costs. The report commences by presenting five investment appraisal methods that can be used to evaluate the capital equipment investment: net present value method, the return on capital employed (ROCE), the profitability index, payback period, and the internal rate of return (IRR). On addition to this, the report presents the risk and uncertainty inherent to the capital investment before concluding by giving the summary of the main ideas in the entire report.
Alternative Methods of Investment Appraisal
There are many simple and sophisticated investment appraisal techniques including discounted and non-discounted methods. The following methods can be used to evaluate the capital equipment investment.
- Net Present Value
NPV means the appraisal technique for an investment which measures the net cash flow, whether short fall or excess, after meeting the finance commitments (Damodaran, 2011). The method rakes in to account the present value of all the expected future cash flow (both cash inflow and cash outflow)………………………….