The sole objective of capital appraissal is to identify projects that add to shareholder value/shareholder wealth.
Its interesting to note the developments that have taken place in investment/Capital appraisal to cater for the deficiencies in the traditional appraisal methods such as NPV and IRR. With Adjusted NPV, projects that could be declined because of negative NPV can, with further analysis of the tax shield effects show overal positive NPV. Tax shield from interest rate is a critical component in financial management. This analysis can also assist financial managers to derive the Weighted Average cost of capital (WACC) where such information as the target capital structure is not readily apparent from the financial strategy and financial information of the business.
In environments with high tax rates such as Zimbabwe (30.9% corporate tax), the tax shield effect would require serious consideration in investment appraisal.
With the target growth rate of 4% (Ministry of inance) /3.7% World Bank for 2009, one would expect capital projects to slowly come back to the market and financial managers would have to advise management appropriately on any capital investments by due investment appraisal and taking into account qualitative & risk factors such as sovereign risk.
Dony Mazingaizo has an interest in IFRS and Financial Management
