3.8 - Investment Appraisal Flashcards
The average rate of return (ARR)
calculates the average annual profit of an investment project, expressed as a percentage of the initial amount of money invested
The cumulative net cash flow
is the sum of an investment project’s net cash flows for a particular year plus the net cash flows of all previous years
A discount factor
is the number used to reduce the value of a sum of money received in the future in order to determine its present (current) value
Discounted cash flow
uses a discount factor (the inverse of compound interest) to reduce the value of money received in future years because money loses its value over time
Investment
refers to capital expenditure or the purchase of assets with the potential to yield future financial benefits
Investment appraisal
is a financial decision-making tool that helps managers to determine whether certain investment projects should be undertaken based mainly on quantitative techniques.
Net present value (NPV)
calculates the total discounted net cash flows minus (-) the initial cost of an investment project. If the NPV is positive, then the project is viable on financial grounds
The payback period (PBP)
is an investment appraisal technique that calculates the length of time it takes to recoup (earn back) the initial expenditure on an investment project
The principal (or capital outlay)
is the original amount spent on an investment project
Qualitative investment appraisal
refers to judging whether an investment project is worthwhile through non-numerical techniques, such as determining whether investment is consistent with the corporate culture
Quantitative investment appraisal
refers to judging whether an investment project is worthwhile based on numerical (financial) interpretations, namely the PBP, ARR and NPV methods
