Investment appraisal. Investment strategy

Appraisal is a word much used by finance people, especially when it comes to strategic decisions. We have strategic investment, which can mean investment in non-current assets, tangible and intangible, that add to the infrastructure of the business and enhance earning capacity by means of higher revenues or lower operating costs and more efficient operation. To City folk, investment and strategic investment are more likely to be thought of as investment in companies supporting growth through acquisition strategy. Investment can also mean investment in people.

This chapter outlines the models and measures that can be used to assess or appraise whether investment should be made, the essential tools for project appraisal, company valuation etc: this is maybe the most important part of financial strategy, investing for the future. If you want a value-destroying strategy, avoid rigorous investment appraisal!

There are two paths or strategies to follow when investing: internal investment (growing the business as it exists now) and organic growth. Successful companies are very rigorous with their investment appraisal processes, especially where the overall strategy is of continuity and sustain-ability - that is, one of level or managed growth rather than rampant growth through diversification or more likely acquisition.

In some sectors and in the minds of most CEOs whose 'vision' is only as far as their exit, organic growth is too slow. Growth must come from acquisition - an acquisition strategy.

Whether 'visions' are achievable or not is fundamental, but once an acquisition has been identified, proper due diligence should be focused on modelling whether the growth in positive net cash flows is really attainable.

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