5.1 Introduction
In the previous chapter we established that the most theoretically correct approach
to assessing investment opportunities is on the basis of their net present values. This
involves identifying the cash flows and their timing and then discounting by an
appropriate factor.
In this chapter we shall examine how the business should go about identifying
the cash flows and assessing them, particularly in the NPV context. We shall also
consider some other practical problems, including how a business should deal with
a situation of having insufficient finance to support all of the projects that appear
desirable. While the focus will be on the more practical aspects of using NPV, many of
Practical aspects of investment
appraisal
In this chapter we shall deal with the following:
‘the importance of cash flows rather than accounting flows for investment
decision making
‘the relationship between cash flows and accounting flows
‘the importance of assessing the timing as well as the magnitude of cash flows
‘the need to identify only those cash flows that differ according to the
decision and to identify all of them even where they are not obvious
‘taxation in the investment decision
‘the treatment of inflation in the investment decision
‘how the basic NPV rule must be adapted to deal with situations where there
are shortages of investment finance
‘replacement decisions
‘the importance of establishing routines to try to identify possible projects
‘the link between strategic planning and investment decision making
‘value-based management
Chapter 5