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Choosing the Appropriate Method of Capital Investment Evaluation Process

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Surveys of capital budgeting practices in the UK and USA reveal a trend towards increased use of more sophisticated investment appraisals requiring the application of DCF techniques. Several writers, however, have claimed that companies are under-investing because they misapply or misinterpret DCF techniques. Such claims have been made on the basis of observations in only a few companies, or anecdotal evidence, without any supporting statistical evidence. Reports on a survey conducted by the Drury C. & Tayles M. (1997) suggest that many UK firms are accountable for misapplying DCF techniques. In this survey, they have tested three areas where misapplication could have taken place.

These are the selection of investment appraisal techniques, treatment of Inflation and Uses of the discount rate. In addition to that, they have tested the major reason that is cited to explain why the financial appraisal often fails to justify investment in Advanced Manufacturing Technology (AMT). It is because those benefits which are difficult to quantify are either understated or frequently omitted from the financial appraisal. As a result of that, UK organizations may be failing to achieve profitable investment. On the other hand, when we are considering the appraisal of AMT project, different researchers have established diverse arguments.

Kaplan (1986) argued that conventional DCF method should be used based on the financial data available to appraise the AMT projects. Meredith & Suresh (1986) also developed the new approach consisting of flexibility, high level of risk and the synergy of Flexible Manufacturing Systems (FMS) when linked together with other systems. These three levels were tested on different appraisal techniques and try to overcome the problems associated with Kaplan’ s Model.

But later, Browmich & Bhimami (1991) developed the model which quantifies all the benefits either in financial terms or score value terms.

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preview essay on Choosing the Appropriate Method of Capital Investment Evaluation Process
  • Pages: 14 (3500 words)
  • Document Type: Essay
  • Subject: Technology
  • Level: Undergraduate
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