Investment appraisal is a collection of techniques used to identify the attractiveness of an investment. General The purpose of investment appraisal is to assess the viability of project, programme or portfolio decisions and the value they generate. In the context of a business case, the primary objective of investment appraisal is to place a value on benefits so that the costs are justified. There are many factors that can form part of an appraisal.
A fixed capital investment can be tangible asset, such as a building, or an intangible asset, such as an intellectual property. Working capital refers to the deployment of financial resources in the day-to-day business operations. Investing in working capital involves acquiring short-term assets and incurring short-term liabilities.
Scope Fixed capital investments serve strategic objectives -- that is, long-term plans of the business. The benefits of fixed capital investments are spread over several years.
In contrast, working capital investments serve operational objectives -- that is, day-to-day activities of the business. Therefore, the scope of a fixed capital investment stretches several years ahead, while that of a working capital investment is limited specific accounting periods or fiscal years.
Liquidity Liquidity is the ease with which business resources can be converted into cash. Working capital assets have high liquidity because they can readily be converted into cash.
For example, a business can easily convert accounts receivables into cash through invoice factoring -- that is, selling invoices to third parties. Fixed capital assets, on the other hand, have low liquidity because they are expensive and require lengthy asset-disposal procedures.
Budgeting Fixed capital investment decisions are made through capital budgeting processes. Capital budgeting involves comparing the cash flows a fixed asset investment can generate during its useful life.
This is done using techniques such as net present value, internal rate of return and payback period. A fixed capital investment is accepted only when its potential cash inflows outweigh the cash outflows.
The budgeting process for working capital investment is based on the estimated scope of operations for a particular accounting period or fiscal year. Financing Working capital investment is financed through short-term debt while fixed capital investment is financed through long-term debt.
Short-term debts are lines of credit, such as bank overdrafts, that are repayable within a year. They are listed as current liabilities in the balance sheet.
Long-term debts are repayable over longer periods of time. They are listed as long-term liabilities in the balance sheet.
Procurement Working capital investment must be procured with urgency to facilitate smooth business operations. For example, a manufacturing business must always have sufficient inventory to avoid unnecessary interruptions of production activities.
The procurement of fixed capital investment is a lengthy process, especially when it involves borrowing finance from external sources.32 student accountant April technical Sessions 18 and 19 of the Study Guide for CAT Paper 4 are concerned with the use of discounted cash flow (DCF) methods in the appraisal of capital investment.
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Capital investment refers to commodity or money paid in return for any kind of asset, non-fixed or fixed. Specialized Appraisal Services For Direct Lenders, Portfolio Lenders, Hard Money Lenders, SBA, Banks, Court, Probate, Fed, Insurance and Retail Direct To Client.
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