This final lesson covers the techniques treasury uses to evaluate investment opportunities and business value.

8.1. The Principles of Investment Appraisal

The purpose of investment appraisal is to evaluate the viability of investment projects. The ACT syllabus requires candidates to “recommend and justify a range of appropriate practical valuation and investment appraisal techniques and calculate business and project valuations and outcomes” . Discounted Cash Flow (DCF) is “hugely important and present in every aspect of financial evaluation” .

8.2. Key Appraisal Techniques

  • Net Present Value (NPV): The difference between the present value of cash inflows and outflows. A positive NPV indicates value creation.

  • Internal Rate of Return (IRR): The discount rate that makes NPV equal to zero.

  • Payback Period: The time required to recover the initial investment.

8.3. Business Valuation Methods

Beyond project appraisal, treasury may be involved in business valuation. Key methods include:

  • Discounted Cash Flow (DCF): Valuing a business on the present value of its expected future cash flows.

  • Multiplier Models: Valuing a business using multiples like Price-to-Earnings (P/E).

  • Asset-Based Valuations: Valuing a business based on the value of its underlying assets.

The CTP exam also covers these valuation concepts, making them central to professional treasury practice [citation:5, 9].

PreviousNext