Investment Appraisal

This book examines the various financial models used in the appraisal of capital assets. Capital investment decisions are amongst the most difficult and important decisions faced by financial executives. Academics are unequivocal in the advice they give to firms and to managers about how to appraise large scale capital investment projects. The NPV rule is regarded, by many, as the definitive investment appraisal technique. On this, the academic literature is clear. However, although managers are faced with a variety of financial models when appraising capital projects, not all managers accept the theoretical consensus about which to use. Considerable theoretical and empirical work has been undertaken to try to understand why managers do not fully accept the advice of academics on the subject of capital investment appraisal (or as some accountants prefer to call it capital budgeting). However, no conclusive answer has been reached. While each model aims at assessing the "acceptability" of a project, each looks at "acceptability" from a different perspective. The NPVP model extends the NPV by incorporating the discounted payback, marginal growth rate.