The use and usefulness of investment appraisal techniques in non-financial services Maltese listed companies

Abstract

Purpose: The purpose of this study is to analyse the actual use and the eventual usefulness of Investment Appraisal Techniques (IATs) in non-financial services Maltese listed entities. The main objective of the study is to determine the extent to which these IATs are applied in such entities, and whether the outcomes they project generally conform to the actual results obtained from projects accepted. This study further aims to discover if such entities take into consideration in their feasibility studies additional factors other than financial ones, and if so whether such factors have a bearing on the ultimate decision whether to accept a project or not. Finally, the execution of effective Post Implementation Audits (PIAs) following an investment decision based on IATs will be investigated. Design: The objectives of the study were achieved through eleven semi-structured interviews, two telephone interviews and four mail questionnaires held with or sent to representatives of these entities. Four semi-structured interviews were also held with three representatives of major non-listed entities and a freelance consultant with the aim of cross checking the responses of listed entities' participants, and to obtain a general overview of the usefulness of IATs in the local scenario. Findings: This study revealed that, because of the often irreversible impact of major investment decisions, it is essential for entities to carry out extensive feasibility studies before committing to such investments. Most of the entities studied consider IATs to be the best means of appraising a proposed investment project from a financial perspective. However, they did not exclude the possibility of eventual variances between projected and actual results since investment appraisal projectio Non-quantitative factors are also deemed important and are consequently thoroughly considered before these entities commit themselves to an investment decision. The importance of formal monitoring of the progress of an investment is also recognised, but PIAs are rarely carried out. Conclusion: The study concludes that when appraising an investment decision, the use of IATs is very important, and they should be employed by such entities to increase the chances of choosing wealth-creating investment decisions. However, iv even the proper use of IATs does not necessarily ensure success of selected projects, since the future is subject to various uncertainties which are usually difficult to forecast. Moreover, non-financial factors which are not captured in the financial model might be vital to the success of an entity, and yet these also cannot always be forecasted with accuracy. Therefore feasibility studies help, but do not guarantee success. Value: It is expected that this study will be of use to Maltese decision makers by helping them to take the appropriate approach when appraising proposed investment projects. It also aims to highlight the risk of total reliance on IATs and to increase awareness of the need of adopting a holistic approach when evaluating investment opportunities.