3.3.2 Investment Appraisal Formulas, adv and disadv *

Question 1

What is payback period

Answer 1

The time it takes for a project to pay back its initial cost

Question 2

What is ARR

Answer 2

• The total accounting return for a project to see if it meets its return

Question 3

What is NPV

Answer 3

• Calculates the monetary value now of the projects future cashflows

Question 4

What are the benefits of payback period

Answer 4

• Simple and easy to calculate
• Emphasises speed of return

Question 5

What are disadvantages of payback period

Answer 5

• Ignores cashflow after investment has been paid back
• Takes no account for the value of money

Question 6

What are the advantages of ARR

Answer 6

• Easy to calculate

Question 7

What are the disadvantages of ARR

Answer 7

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