Overview
In this overview lesson, you'll learn what investment appraisal is and why it matters for long-term business decisions. Investment appraisal is how companies evaluate whether projects will create shareholder wealth by measuring returns against set benchmarks.
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In this lesson
- 0:00 Investment appraisal and shareholder wealth
- 0:56 Understanding relevant cash flows
- 1:51 Three criteria for relevant costs
- 3:42 Worked example: identifying relevant costs
- 7:43 Decision-making with correct relevant costs
About this lesson
The foundation of every appraisal technique is understanding relevant cash flows—the costs and revenues that actually matter to your decision. You'll discover the three essential criteria that define a relevant cash flow: it must be in the future, incremental to the decision, and an actual cash movement. This means excluding sunk costs (money already spent), fixed costs that won't change, non-cash items like depreciation, and reallocated costs. Through a worked example, you'll see how misidentifying relevant costs leads to wrong investment decisions—and how applying these principles correctly reveals whether a project truly creates value. This lesson is essential for FM, AFM, and performance management papers, where investment appraisal underpins capital budgeting decisions and strategic financial planning.
Duration: 8m
Transcript
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