CHAPTER 8
APPROACHES TO INVESTMENT VALUATION
Enterprises typically have to address many opportunities for investments. Often they create these opportunities via R&D or market research. Sometimes these opportunities represent the convergence of the enterprise’s aspirations and an unexpected way to fulfill these aspirations—in other words, serendipity. Regardless of the source, a central question concerns the worth or value of the opportunity relative to the cost of pursuing it. In part due to uncertainty, enterprises usually want the assessed value to substantially exceed the projected costs.
This chapter does not address the noneconomic attributes of investments, which are often very important. For example, when a firm invests in upgrading its business processes, or in R&D to create new, proprietary technologies, it usually has other concerns that extend beyond only the economic value of the monetary investment. Typical additional concerns include strategic fit, leveraging of core competencies, and the extent to which the investment is likely to create a sustainable competitive advantage (Rouse, 2001). An investment not compatible with the firm’s business strategy, or one that requires new competencies or that creates only temporary advantage, is less likely to garner investment despite its potential investment value greatly exceeding its costs.
This chapter addresses several alternative methods for valuation of investments including discounted cash flow (DCF), the capital asset ...
