Financial Appraisal

Abstract

Financial analysis provides decision-makers with information about the costs and revenues of their investment projects (Sect. 7.1). The time value of money is in this respect a central concept. Dollars at different points in time are compared when money is borrowed or when it is invested (Sect. 7.2). More specifically, the methodology is concerned with sustainability and profitability. A strategy is said to be financially sustainable when it does not incur the risk of running out of cash during its lifetime (Sect. 7.3). Financial profitability is the ability of the project to achieve a satisfactory rate of return (Sect. 7.4). Another important consideration is whether cash flows are to be expressed in current or real value (Sect. 7.5). Additional methods (e.g., accounting rate of return, break-even point or payback period) can also be used to compare different investment strategies based on the extent to which the return on investment compensates the initial outlay, the volume of activity that is needed to cover the costs, or the time it takes for a strategy to earn back the money initially invested (Sect. 7.6). Last, the model’s assumptions can be investigated with a deterministic sensitivity analysis through the calculation of switching points and elasticities (Sect. 7.7). A spreadsheet framework example is accompanying the reader across the sections.