Investment Appraisal: Purpose and Importance
Investment activity is performed mainly under conditions of uncertainty, which arises from a lack of knowledge and randomness. The purpose of appraisal of investment projects is to answer several questions comprehensively (Gaweł, Rȩbiasz, and Skalna, 2017). The first is what the return on investment is, the second concerns what the project’s payback period is, and the third is about the potential risks (Gaweł, Rȩbiasz, and Skalna, 2017). Thus, investment appraisal diminishes uncertainty arising from ignorance and variability.
More commonly used methods are Cost Comparison and Profit Comparison. In addition, other techniques, such as ELECTRE and PROMETHEE, solve multi-criteria selection problems, reduced to a standard form (Brans, Vincke, and Mareschal, 1986). An alternative criterion matrix is used as input; the decision-making speed and certainty will depend on what data is needed for the investor (Brans, Vincke, and Mareschal, 1986). Therefore, a competently conducted investment appraisal allows for assessing the total need for financing and the availability of the necessary conditions (Gaweł, Rȩbiasz, and Skalna, 2017). In addition, the appraisal helps to identify factors that can affect the actual results of investment and adjust their action. Moreover, it evaluates the acceptable risk and returns parameters and assists in developing measures for post-investment monitoring.
Brans, J. P., Vincke, P. and Mareschal, B. (1986) ‘How to select and how to rank projects: The PROMETHEE method’, European Journal Of Operational Research, 24(2), pp. 228-238.
Gaweł, B., Rȩbiasz, B. and Skalna, I. (2017) ‘Application of probability and possibility theory in investment appraisal’, International Conference on Information Systems Architecture and Technology (ISAT) Conference proceedings. Szklarska Poręba, Poland, 17-19 September. Cham: Springer, pp. 47-56.