3.3.2 Investment Appraisal

Question 1

What does investment refer to? (2 different things)

Answer 1

purchase of capital goods e.g. machinery

expenditure by business likely to yield return in future

Question 2

What is an investment appraisal?

Answer 2

describes how a business evaluates investment projects to see if they are profitable

Question 3

How do businesses show investment appraisal?

Answer 3

compare capital cost with project with net cash flow

Question 4

How do you calculate net cash flow?

Answer 4

Inflows-Outflows

Question 5

Define payback period?

Answer 5

refers to amount of time it takes for project to recover or pay back initial outlay

Question 6

How do you calculate payback period?

Answer 6

Initial investment divided by cash inflow per period

Question 7

2 advantages of payback period?

Answer 7

simple to use

important to recover costs of investment before new model is used

Question 8

What is average rate of return?

Answer 8

measures net return each year as percentage of cost of investment

Question 9

Calculation for average rate of return/

Answer 9

net return per annum
—————————– x100
capital outlay

Question 10

what are the 3 steps in calculating ARR?

Answer 10

1. calculate profit for each project
2. calculate profit per annum by dividing by number of years the project runs for
3. use ARR formula

Question 11

advantage of the ARR method?

Answer 11

clearly shows profitability of investment project