Strategic Investment Appraisal, Free Essay Example

Investment plays an integral role in a firm's long-term decision-making. Therefore, organizations need to harness the concept of investments and direct the organization's funds to acquiring machinery, building and land. Long-term investments maximize organization profit since the firm will be able to generate more income at a lower cost of production hence the company will secure higher income compared to the funds committed. Individual companies are required to evaluate the firm's quantity of funds both inflow and outflow, the cost of acquiring the funds, the lifespan of the investment and the associated operational risk intensity.

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Any business must consider the investment as a focal point for building and developing both the internal and external business structure.

A company's productivity can merely be boosted through the purchase of new and efficient assets such as machinery thus cutting down on the production cost and setting a competitive business parameter. Growth opportunities are easily seized through investment in brand development, expertness, new markets as well as research and development. In as much as the firm focuses on strategic investments, boundaries should be highlighted to avoid overstretching confined financial resources beyond elastic limits and restricting the ability of decision-makers to pursue other options. Investment s appraisal helps decision makers and the business to identify the most effective and efficient methods concerning the cost and applicability of the approaches in the realization of the organization's goal.

Projects outset and investments are the gateways to growth and market expansion of any firm. Analysis and evaluation of projects by economic, financial data and cost are the vital building block of any investment. With the help of the investment appraisal techniques managers can get hold of the financial data and evaluate the financial viability of every project. Discount rate and the estimated cash flows are the duo inputs of strategic investment appraisal. Estimated cash flows define all the cash outflows from the initial phase till much later while the cash inflow is experienced during the entire existence period of the project the combination of the two generates a final figure which is the cash flow and cash flow may have either a positive or negative value. Projects are usually rejected when the calculation of the cash flow figure indicate a higher value in outflow and a lower value of inflows which generates a negative value. Before starting a business or contemplating an investment it vital for incorporation of a strategic investment appraisal to inform your decision in the new enterprise. Strategic investment appraisal is essential for the following reasons

General Feasibility

The strategic investment appraisal often reviles the general feasibility of the project and encompasses the net present value analysis. Through the analysis of the projects annual report and the projected cash flow, one will be able to pick the best idea which has the highest profitability value of the project in both the short and long-term

Alternative Possibilities

Alternatives always exist in any form of investment hence decision-makers must understand how all the alternative are graded with both the long and short-term organizational objective. Precisely an excellent strategic investment appraisal should incorporate a review of numerous available investments and contrast between alternative projects and the proposed project.

Financing

Capital resources are the most sensitive part of the investment appraisal. It is at this point where decision-makers can evaluate if the capital resources create investment feasibility through the analysis of the additional capital contribution and the initial capital requirement.

Strategic Fit

At this point, stakeholders can note how well the projects qualify for the organization's strategic plan and also highlights the projects overall financial dominance.

Strategic Investment appraisal Techniques

Balanced Scorecard

Is considered a strategic and management structure used by managers in companies to, outline what the organization is set to achieve inclusive of both short term and long term objectives, align daily operation activities strategically, priorities projects, services and products and finally measure and evaluate progress towards strategic targets. Balanced scorecard encourages that an organization should be viewed from financial, customer, internal process and organizational capacity perspective and relates them to the developed measures, objectives, targets and initiatives.

According to Nielsen, & Thomsen,(2017),they came up with the famous balanced scorecard as one of the frameworks that provided the opportunity for connecting the non-financial measure with the financial measure of performance. This involves the internal business process, the customers and innovation and learning to provide a manager with the best platform that will make them evaluate performance in general. In general, management will advocate the balanced scorecard as a decision making and strategic management tool, which demonstrates that it is one of the significant tools for capital investment decision making.

Through a balanced scored, it offers a better framework within which some of the existing financial analysis tools such as the net present value can also be adopted at the same time with the internal business impacts and innovation. With such technique, it is important to note that an established financial analysis approach can be put in place with other metrics that provide an evaluation of the strategic project fit. Such appraisal always demands significantly more input from the executive management than the traditional capital investment analysis.

In making use of a balanced scorecard method when conducting an investment appraisal, it significant to weigh up various qualitative and quantitative approach of the project to arrive at the score of the final project as a manager, this is one of the challenging processes that demand a long period of deliberation and negotiation about the main outcome and aim of a project. However, it is important to note that the process that involves negotiation through this issues have some significant advantages. It creates demand and makes the manager put into consideration on some of the critical outcomes and aims of a project.

Strategic Cost Management

Strategic Cost Management is a systematic management approach which focuses on cutting down operational cost of production in companies while maintaining sustainable growth. Strategic cost management plays a significant role in the identification of primary cost drivers which in turn will be used by companies to target on critical activities that will make up 90 percent of the total cost.

Strategic cost management forms one of the appropriate frameworks for offering some of the strategic issues much more attention when it comes to the general decision-making process. Noting the need for evaluating the strategic issues of a project as well as their cash flow, the strategic cost management analysis is made up of three related elements that involve cost driver analysis, developing appropriate competitive strategies and the general value chain analysis. Technically, the value chain analysis is recognized as one of the essential tools for building activities all the way from basic raw materials in connection with the component suppliers up to to the end-use product that is hence delivered into the hands of the final consumers. Through strategic cost management, it is important to note that the strategic cost management plays an important role in blending value cost analysis with the competitive advantage and the general cost drivers. The first thing demand that the cost drivers are supposed to be effectively analysed so that their general impact on the competitive position and the company's cost structure are understood. Through a proper competitive advantage analysis, it is important to operate with the fact that project appraisal demands the ability of a project to contribute to the chosen strategy, for example having to lower the general cost and enhance the process of differentiation.

Fuzzy Set Theory

Fuzzy theory is a binomial approach applied in project valuation under uncertainties. The fuzzy theory also forms a disclosure of the value of variables flexibility which is usually encapsulated in the project blueprint. Besides, the Fuzzy theory provides a scientific framework for computing the mean value of the projects Net Present Value (NPV) which is often equated to the entire value of the project

Fuzzy set theory and the analytical hierarchy process

This is one of the mathematical approaches that provide the combination of the elements of the mathematical concept of fuzzy set theory with that of the mathematical approach to purpose one of the great model for evaluating one of the advanced manufacturing technology investment. An evaluation is concerning intangible benefits, financial return and the model adopting fuzzy to take into account the estimate of cash flow.

Analytical hierarchy process has been proposed as an approach of systematizing and structuring the evaluation of some of the non-quantifiable attributes of a project. This method demands that the process of decision making is formulated with a decision challenge and attributes that are important in fulfilling the strategic goals of an organization. This approach gives the opportunity to the decision makers to put the focus on the project attributes and hence incapable of eliminating subjectivity when it comes to a decision making process. On the other hand, the fuzzy set theory provides a significant variable to be presented by the fuzzy numbers. In this case, a project expected performance needs.

Two platforms have emerged in the recent past that have formed essential avenues in coming up with an alternative strategic investment appraisal. It is important to note that the first alternative involves building the established methods that are important in incorporated the strategic projects that have been neglected in the past. The analytical hierarchy process and the fuzzy set theory plays an important role in fitting into this category. The second approach involves coming up with an analytical framework that offers an important departure from risk and financial analysis. This kind of approaches is used from outside the finance domains and the traditional accounting.

Working as a financial director, the strategic investment appraisal is supposed to be adopted in conducting all the decision that pertains capital investment. Through this, a planning process is hence facilitated when it comes to determining the concerned firm's investments, both in the short term and the long-term. It is also important to note that through strategic cost management, cost management plays an important role in blending value cost analysis with a competitive advantage and the general cost drivers. The first thing demand that the cost drivers are supposed to be effectively analysed so that their general impact on the competitive position and the company's cost structure are understood. Through a proper competitive advantage analysis, it is critical to operating with the fact that project appraisal demands the ability of a project to contribute to the chosen strategy, for example having to lower the general cost and enhance the process of differentiation.

Reference

Nielsen, C., Lund, M., & Thomsen, P. (2017). Killing the balanced scorecard to improve internal disclosure. Journal of Intellectual Capital, 18(1), 45-62.