3.3.2 Investement Appraisal

Question 1

Investment appraisal

Answer 1

Series of techniques designed to assist businesses in judging the desirability of investing in particular projects

Question 2

Financial methods

Answer 2

Payback method - calculates length of time it takes for an investment to recoup its original cost
Average rate of return - calculate the annual average return over the life of an investment in order to compare investment with other alternatives
Net present value - can be used alongside other techniques + considers future value of investment

Question 3

Simple payback

Answer 3

Quick + simple investment appraisal tool
Simply focuses on time taken to recoup initial investment + considers cash inflows over number of years

Initial outflows / net cash flow per period x12

Question 4

Payback pro/cons

Answer 4

+busi can identify point at which investment is paid back contributing to cash flow
+simple

-may encourage short-termism sacrificing long term
-provides no insight into profitability of investments

Question 5

Average rate of return

Answer 5

How quickly investment is going to provide profit
ARR

Question 6

ARR formula + steps

Answer 6

Average annual profit / cost of investment x100

1. Find profit from investment
2. Average annual profit = total profit / no of years
3. Formula subs
4. X by 100 to get %

Question 7

Net present value

Answer 7

Loses value over time, depreciates die to risen price
E.g Fredo 2005 = 10p can buy 10 with 1 pound
Fredo 2025 = 30p still 1 pound but can only buy 3
Therefore value lost

Taking future values + bringing into present

Question 8

Net present value Eq

Answer 8

Cash flow x discount factor = present value