3.3.2 Investment appraisal

Question 1

What is a payback period?

1

Answer 1

• Time for project to repay it’s initial investment

Question 2

How do you interpret payback period

1

Answer 2

• Businesses want short payback period possible (money not at risk)

Question 3

How do you calculate Average Rate of Return (ARR)?

1

Answer 3

• Average annual return x100

Initial outlay

Question 4

How do you calculate Average Annual Return

1

Answer 4

• Cumulative cash flow

Years (£)

Question 5

How do you interpret ARR?

1

Answer 5

• Firms want as high rate as possible (^profitable)

Question 6

How do you calculate NPV?

2

Answer 6

• See what prevailing rate of interest will be
• All net cash flow x df = PRESENT VALUES
• +Present values = NPV

Question 7

How do you calculate payback period part way through the year?
1

Answer 7

• Outlay outstanding

Monthly cash in yr of payback