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Glossary

Investment Calculation

Summary

Investment appraisal is a central tool in corporate controlling, used to assess and evaluate future investments. Various methods are applied to examine the profitability of an investment. Investment appraisal enables decisions to be made on a well-founded basis, thus contributing to the long-term success of a company.

Investment Appraisal: Definition, Methods, and Importance

Investment appraisal is a subfield of business administration that deals with the systematic planning, evaluation, and control of investments. The goal of investment appraisal is to examine the economic viability of investment projects and to create a basis for decision-making for their implementation. Various methods are used to estimate the profitability and success of an investment.

Investments and Their Importance

Investments are long-term capital commitments in assets that are intended to generate returns. They can consist of tangible assets (e.g., machinery, buildings) or intangible assets (e.g., patents, licenses). Investments are of great significance for companies as they create the foundation for growth, innovation, and competitiveness. At the same time, they are associated with high costs and risks, which is why careful investment appraisal is essential.

Methods of Investment Appraisal

There are various methods for investment appraisal, which can be differentiated into static and dynamic methods:

Static Methods

     
  • Cost Comparison Analysis: Comparison of the costs of two or more investment alternatives. The alternative with the lowest costs is preferred.
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  • Profit Comparison Analysis: Calculation and comparison of the profits of various investment alternatives. The alternative with the highest profit is preferred.
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  • Payback Calculation: Calculation of the time needed to cover the acquisition costs of an investment through the expected profits. The shorter the payback period, the better the investment.
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  • Static Profitability Calculation: Calculation of the profitability of an investment based on the expected profits and costs. The alternative with the highest profitability is preferred.

Dynamic Methods

     
  • Net Present Value Method: Discounting the future cash flows of an investment to the time of the investment decision. The alternative with the highest net present value is preferred.
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  • Internal Rate of Return Method: Determination of the interest rate at which the net present value of an investment is zero. The alternative with the highest internal rate of return is preferred.
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  • Annuitization Method: Calculation of the annual cash flows of an investment that lead to a net present value of zero. The alternative with the highest annuity is preferred.
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  • Dynamic Payback Calculation: Calculation of the time needed to cover the acquisition costs of an investment through the discounted cash flows. The shorter the payback period, the better the investment.

Unlike static methods, dynamic methods take into account the time value of money and are therefore considered to be more accurate and informative methods for investment appraisal.

Investment Appraisal and Corporate Success

Investment appraisal contributes significantly to the success of a company by providing a solid foundation for investment decisions. Through the systematic evaluation of investment projects, bad investments can be avoided and long-term competitiveness can be secured. Investment appraisal is thus a central tool in corporate controlling and contributes to the security of growth, innovation, and profitability.

Conclusion

Investment appraisal is an essential tool for evaluating investment projects in companies. By applying various methods, especially dynamic ones, the economic viability and profitability of investments can be assessed. Investment appraisal enables well-founded decisions to be made, thus contributing to the long-term safeguarding of corporate success.