209-210 Investment appraisal and Special orders Flashcards
What is investment appraisal?
Investment appraisal is a technique used to evaluate planned investment by a business and measure its planned financial value to the business.
What is payback?
The amount of time it would take for a business to recover a project’s initial cost.
What is the average rate of return (ARR)?
This measures the average annual profit as a percentage of the initial investment.
What is discounted cashflow/net present value?
This takes account of the ‘time value of money’ which recognises that e.g. £1 earned in five years’ time is not the same as £1 earned today. It shows how much an investment is worth throughout its lifetime, discounted to today’s value.
What are special orders?
A special order is an extra order or an order for an item specially requested by a customer.
What is contribution in business?
This allows a business to analyse whether each of its products covers its own variable costs. After variable costs have been taken away from the selling price, what is left ‘contributes’ to paying off the fixed costs. After these have been paid, what’s left is profit.
What is total contribution?
Total revenue – total variable costs.
