10 Investment Appraisal Flashcards
Formula for ARR
average profit per year/cost of initial investment x100.
Define investment appraisal
involves comparing the expected future cash flows of an investment with the initial outlay for that investment.
Define the payback period
The payback period is a calculation of the amount of time it is expected an investment will take to pay for itself.
Define net present value
Net Present Value (NPV) is a financial metric used to evaluate the value of an investment or a project.
Formula for simple payback
amount required (initial outlay)/net cash flow in a year
Define average rate of return
compares the average profit per year generated by an investment with the value of the initial outlay.
Formula for NPV
multiply the net cash flow each year by the discount factor
then add together the discounted cash flow values for each year
Define discounted cash flow DCF
a method of investment appraisal that takes into account interest rates into account by calculating the present value of future income.
Formula for net cash flow
cash inflows - outflows
Define present value
the value today of a sum of money available in the future.
Define investment
the purchase of capital goods.
Define capital cost
the amount of money spent when setting up a new venture
Define share capital
the amount of money owners have invested in the business.
