Summary of Investment Appraisal Techniques

Investment Appraisal Techniques

• Surveys by Richard Pike (1989, 1996) on investment appraisal used by large UK firms.

• Key findings from 1975 to 1992 on techniques utilized:

  • Search and Screening: Increased from 76% to 100%.

  • Formal Financial Evaluation: Remained at 100% by 1992.

  • Payback Period: Increased from 73% to 94%.

  • ARR (Accounting Rate of Return): Fluctuated around 50%.

  • NPV (Net Present Value): Increased from 32% to 74%.

  • IRR (Internal Rate of Return): Increased from 44% to 81%.

Number of Methods Used

• 1975 to 1992 Trends:

  • No methods decreased to 0%.

  • One method decreased from 31% to 4%.

  • Multiple methods increased over time (3 methods from 22% to 32%, 4 methods from 11% to 36%).

Planning and Control

• Capital Budgeting Procedures Over Years:

  • Procedures and reviews showed consistent increase in practices like capital budget > 2yrs (57% to 68%) and post-completion audits (33% to 72%).

Risk Appraisal Techniques

• Use of various techniques from 1975 to 1992:

  • Shortening payback period rose to 60%.

  • Probability and sensitivity analysis increased notably (9% to 48% for probability analysis).

Inflation Considerations

• Inflation techniques applied at the risk assessment stage showed significant increases in consideration from 14% to 39% by 1992 for general inflation adjustments.

Conclusions from Pike’s Work

• Major shifts in risk analysis and post-completion audits noted.

• Companies demonstrated increased awareness of project failure risks and the necessity of quality assessments in capital budgeting.

Arnold and Hatzopoulos (2000) Survey Insights

• 300 companies surveyed across various sizes; 96 usable responses.

• Findings on common techniques:

  • Payback Period Usage: 70% overall, highest in small firms.

  • NPV: 80% overall, 97% in large firms.

• Investigated factors like cost of capital and risk analysis methods across company sizes.