Investment Appraisal Applications

Question 1

Methods to set a discount rate

Answer 1

1. WACC
   (Weighted Average Cost of Capital)
   - The average return expected by both lenders (debt) and shareholders (equity).
2. CAPM
   (Capital Asset Pricing Model)
   - Estimates the return needed based on investment risk compared to the market.

Question 2

Strategic context of investment appraisal: Methods

(Investment decisions go beyond financial calculations…)

Answer 2

1. Real Options
2. Value Chain Analysis
3. Cost Driver Analysis
4. Competitive Advantage

Question 3

Investment Appraisal: Real Options

Answer 3

• Takes a wider strategic focus than traditional, financially focused methods.
• May result in investments with negative NPV

Question 4

Investment Appraisal: Value Chain Analysis

Answer 4

• “Value chain” = activities linking from basic raw materials to ultimate end product
• Investments should strengthen areas improving efficiency, lower costs, or differentiate the business

Question 5

Investment Appraisal: Cost Driver Analysis

Answer 5

• Factors that influence total costs in business operations
• Investment decisions should focus on reducing high-cost areas to improve efficiency.
• Helps decide where to invest for long-term savings

Question 6

Investment Appraisal: Competitive Advantage

Answer 6

• Unique factors that help a company stand out
• Investment decisions should strengthen long-term positioning.