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Investment appraisal

Considers the benefits of an investment decision in relation to the anticipated costs. Benefits might include increased revenues and / or reduced costs. Costs might include the initial capital outlay and running costs. Investment appraisal – in the context of location decisions: involves comparisons between cash inflows (revenues) and cash outflows (costs) at different locations. It concerns the speed at which the actual investment involved in locating at a particular site is paid back, or the rate of return on the investment. If a site has not been purchased, ie if there is no initial investment, then payback and, indeed average rate of return becomes irrelevant. However, discounted cash flow can be used, even though there is no initial investment. If a business relocates – as many businesses seeking growth often do – it will certainly have moving costs and communication costs (in terms of informing its shareholders, suppliers and customers of its new location), as well as possible redundancy payments (if the move is to a location some distance away, or the new location will be more capital intensive). Thus, it is frequently possible to use all three investment appraisal criteria to assess relocation.

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