3.3.2- Investment appraisal

Question 1

What is investment appraisal?

Answer 1

Planning process used to determine weather the long term investments will give the best return

Question 2

What are 3 ways to calculate investment appraisal?

Answer 2

1) Simple payback
2) ARR
3) NPV

Question 3

What is the simple payback equation?

Answer 3

Cost of initial investment/ average yearly net cash flow

Question 4

What is the interpretations of ARR?

Answer 4

Looking for a % and comparing this against putting the investment funds into a safe saving, anything higher then 5% would be good investment

Question 5

What is interpretations of NPV?

Answer 5

Looking for the highest value of investment funds in the future

Question 6

What is interpretations of payback?

Answer 6

Want the least number of years to payback the investment

Question 7

What are the limitations of payback, ARR and NPV?

Answer 7

payback- very simple
ARR- doesn’t take into account effects of time on the value of money
NPV- very complex