3.7.8 - investment appraisal Flashcards
what is investment appraisal?
assessing costs and benefits of an investment
what is payback?
how long it takes to get money back from investment
how do you calculate payback?
-add amounts of money received each year till cost is paid back
-if its in between a year work out how much is left to paid
-divide by yearly inflow
-multiply by 12
what is average rate of return (ARR)?
how much you get back for investment as an annual %
how do you calculate ARR?
-add up all the net cash flows
-minus cost of investment
-divide by number of years
-then divide by cost of investment
-multiply by 100
what can ARR compare?
- investments
- what interest you might get on low risk investments
- borrowing costs
what is net present value (NPV)?
an assumption that money devalues and its better to save it today because it can either be invested to generate a return and grow in value, or it can avoid devalue of money due to inflation
how does NPV work?
it works on the principle that future monies received are not worth the same as the money would be worth today so they’re DISCOUNTED by a certain amount
how do you calculate NPV?
-multiply net cash flow by discount factor for that year
-add up all the answers ignoring cost of investment
-minus cost of investment
