3.8

Question 1

Investment Appraisal

Answer 1

A process a business will go through before deciding on a major capital investment by assessing the financial feasibility of the project.

Question 2

Net Cash Flows

Answer 2

Forecast made of future cash flows.

Question 3

Cash Inflows

Answer 3

Cash Inflows = Annual revenues earned from the project (money that enters the business)

Question 4

Cash Outflows

Answer 4

Cash Outflows = Annual operating costs (money that leaves the business)

Question 5

Payback Method

Answer 5

Length of time it takes for the net cash inflows pay back the original capital cost of investment. Compares how quickly project pays for itself.
Payback Period = Initial Investment OR Original Cost of the Asset / Cash inflows

Question 6

Average Rate of Return (ARR)

Answer 6

Measures the annual profitability of an investment as a percentage of the initial investment.