3.3.2 Inevestment Apparaisal Flashcards
Define investment appraisal
Series of techniques designed to assist businesses in judging the desirability of investing in projects
What are some ways investment appraisal may help decide what to invest into
- non current assets
- launching of new product
- new technology
- expansions
- infrastructure
I hat are the three financial methods
Payback- finding how long an investment will pay back initial investment
Average rate of return- calculates the annual average return of investment
Net present value- considers investment longevity by discounting decreased future value
What are some benefits of using payback
- It’s is simple and quick investment tool
- good for firms that may have liquidity issues
How do you calculate payback
Amount remaining to recover
——————————————- x12
Amount recovered following
Year
What are some benefits and drawbacks of average rate of return
Measure profit achieved by a certain time
- doesn’t consider the life of the project into consideration
How do you calculate ARR
Average annual profit
———————————. X100
Assets initial cost
What are the three steps to calculating ARR
1) total income from investment- cost of investment= total profit from investment
2) total profit from investment
———————————————
Expected lifespan of asset
3) average annual profit
———————————- x100%
Cost of investment
What are some benefits of net present value
- good for considering opportunity costs
- however it is hard to identify opportunity costs
How do you calculate net present value (NPV)
Net cash flow x discount factor
What are some financial factors in which a business may need to consider
- Rate of interest
- return of capital employed
- cost of investment
What are some non financial factors to consider regarding investment
- corporate objectives
- ethics
- industrial relationships
What are some factors that influence risk of investment
- Timescale of investments
- knowledge of the business investment
- the market they are investing in
- stability of external influences
What is sensitivity analysis
This is when a business will use variations in forecasting to allow a range of outcomes
- a business in effect doing what if predictions
What are some examples of sensitivity analysis
- testing NPV but using a variety of discounts
- allowing for 20% of fluctuations
- building in contingency for unforeseen expenses
