Risk assessment in the capital investment appraisal of selected Maltese manufacturing companies : an evaluation

Abstract

"The survival and vitality of a corporation are determined by its ability to regenerate itself through the allocation of capital to productive use. The selection and employment of processes and techniques to decide major financial commitments are crucial" (Arnold and Hatzopoulos, 2000, p. 603). The appraisal of capital investments involves forecasting their future costs and benefits. However, forecasts of the future are uncertain and the bottom-line figures arrived at through the use of traditional investment appraisal techniques will be proved correct only if in reality the cash flows will be exactly the same as the figures forecasted. Therefore, to be meaningful, the appraisal process should also evaluate the risk that variables will change, resulting in a discrepancy between the projected and the actual cash flows.