Why might two businesses appraise the same investment opportunity differently?

Two businesses might appraise the same investment opportunity differently due to variations in their risk tolerance, financial capacity, and strategic objectives.

Risk tolerance is a key factor that influences how businesses appraise investment opportunities. Some businesses are more risk-averse and prefer investments with lower returns but more certainty, while others are more risk-tolerant and are willing to take on higher-risk investments for the potential of higher returns. For instance, a start-up might be more willing to invest in a high-risk, high-reward venture, while a well-established corporation might prefer safer, more predictable investments.

Financial capacity also plays a significant role in investment appraisal. A business with a strong financial position might be able to afford to invest in opportunities that require significant upfront capital, while a business with limited financial resources might need to be more selective and focus on investments that require less capital but still offer reasonable returns. For example, a multinational corporation might be able to invest in a large-scale infrastructure project, while a small business might only be able to afford to invest in a small-scale local project.

Strategic objectives can also lead to different investment appraisals. Each business has its own unique strategic goals and these can influence how they appraise investment opportunities. For example, a business that is focused on expanding its market share might see value in an investment that allows it to enter a new market, while a business that is focused on improving its operational efficiency might prefer an investment that allows it to streamline its operations.

In addition, the appraisal process itself can vary between businesses. Some businesses might use more conservative assumptions in their financial modelling, while others might use more optimistic assumptions. This can lead to different projected returns and therefore different investment appraisals. For example, a business that assumes a higher growth rate for its revenues might value an investment opportunity more highly than a business that assumes a lower growth rate.

Finally, the expertise and experience of the decision-makers can also influence how an investment opportunity is appraised. Decision-makers with more experience or expertise in a particular industry or type of investment might be able to identify potential benefits or risks that others might overlook, leading to a different appraisal of the same investment opportunity.