209 investment appraisal

Question 1

what is investment appraisal

Answer 1

is the process of calculating the attractivness of investments (1). we can do this by factoring in the profitibility of an investment over the life of an asset (1). alongside conciderations of affordibility and stategic skill (1)

Question 2

3 main investment appraisal calculations

Answer 2

payback-> speed of which we get our money back
*average rate of retun (ARR)-> average % of a return
net present value-> accounting gfor inflation (time value of money)

Question 3

(+)/(-) of using payback

Answer 3

(+) - simple to use , easy to cslculate, effectve to use when technology is changing at a fast rate, helps when managing cash flow
(-) ingores cash flow ovetime of the project, ignores total profitibility- focuses on speed of getting investment money baack

Question 4

(+)/(-) of ARR

Answer 4

(+) shows the profitibility of the option, includes all of the projects cash flows, easy to compare different projects, allows comparision with costs of borrowing an investment
(-) ingnores the timing of thr cash flow, does not allow for effects of inflation on values of future cash flows

Question 5

net present value (NPV)/ discounted cash flow (DCP)

Answer 5

• takes into account that the value of money changes overtime
• value of money if you tae into account inflation

Question 6

(+)/(-) of using NPV/DCP

Answer 6

(+) allows for future earning to be adjusted to present values, easy to compate different projects, shows impact of inflation/external factors, allow for effect of risk on estimated future cash flows
(-) difficult to calculate, discount factor can be incorrect amking NPV inaccurate, difficult to set discount factors far into the furure- less relaible

Question 7

qualititive factor afffecting investment appraisal decisions

Answer 7

• impact of staff
• impact on exiisting products
• investment match the stratergy/objectives of business?
• state of the economy eg.booming/recesion/reduce demand
• actions of competitors eg.are they investing/imporving their products?
• availiblity of new tech- encourages further investment
• confidnce of managers- optimistic managers more likely to invest