3.8 Investment and appraisal

Question 1

Investment appraisal

Answer 1

refers to quantitative techniques used to calculate the financial costs and benefits of an investment decision. refers to different methods used to assess risks of investment

Question 2

Payback Period (PBP)

Answer 2

refers to the amount of time needed for an investment project to earn enough profits to repay the initial cost of investment. The formula for calculation the PBP is;

Initial investment cost / Contribution per month

ie a project costs $10,000, financial gain is $6,000
$10,000/($6,000 /12 months) = 20 months

Question 3

Pros and cons of PBP

Answer 3

pros-
-simplest and quickest method of investment appraisal
-can be useful for firms with cash flow liquidity problems, as they can identify how long it would take for the cash investment to be recouped
-compare different projects

cons
-contribution per month is unlikely to be constant
-focusses on time rather than profits
-can encourage short termism