3.3.2 Investment Appraisal

Question 1

What is investment appraisal?

Answer 1

Investment appraisal attempts to determine the value of capital expenditure projects.

Question 2

How can investment appraisal be used in the planning process?

Answer 2

Used to determine whether the long term invest,nets will give the best return. Projects such as; new machinery, premises etc.

Question 3

How is investment appraisal used in decision making?

Answer 3

Investment appraisal is used to work out which project should get the funds.

Question 4

What is ARR?

Answer 4

Payback is very simplistic tool and only looks at when the project will pay back and does not take into account rate of return.

Question 5

What is NPV?

Answer 5

The net present value and it takes into account that money in the future is not worth what it is today – so it adds in a discount table to make it more realistic.

Question 6

What is the payback period?

Answer 6

The time period for the original financial investment cost of a project to be fully recovered

Question 7

What are the limitations of investment appraisal?

Answer 7

-Payback limitations; looks at speed of payback + does not look at profitability.
-ARR limitations; Does not take into the account the effects of time on the value of money.
-NPV limitations; Not by used by small business, also results dependent on the rate of discount used, the higher the rate the more likely it is that the project will be rejected as unprofitable.