Appraisal
methods
Financial analysis is the means of appraising whether a proposed investment
in a commercial activity is likely to be of value from the point of view of the
stockholders. Investments in commercial activities are called capital projects.
They usually involve the purchase of a physical asset, such as a machine or a new factory;
a capital project may also involve investment in a less tangible asset, such as a new
product or an advertising campaign. An essential characteristic of most capital projects
is that cash is paid out now or in the near term in order to increase cash returns
subsequently. The value of a project's future incremental cash flows to the company can be
estimated; using discounted cash flow methods, it is possible to determine whether a
project is worth more to the company than it costs.
Jack Broyles
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