53 - investment appraisal

Question 1

average rate of return or

accounting rate of return (ARR)

Answer 1

a method of investment appraisal that measures the net return per annum as a percentage of the initial spending

ARR% = net return (profit) per annum / 
                   capital outlay (cost)        x100

Question 2

capital cost

Answer 2

the amount of money spent when setting up a new venture

Question 3

discounted cash flow (DFC)

Answer 3

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Question 4

investment appraisal

Answer 4

the evaluation of an investment project to determine whether or not it is likely to be profitable
- allows businesses to make comparisons between different investment projects

Question 5

net cash flow

Answer 5

cash inflows - cash outflows

Question 6

net present value (NPV)

Answer 6

the present value of future income from an investment project, minus the cost

Question 7

payback period

Answer 7

the amount of time it takes to recover the cost of an investment project

Question 8

present value

Answer 8

the value today of a sum of money available in the future

Question 9

quantitative method used to evaluate investment projects

Answer 9

• capital cost

- net cash flow

Question 10

advantages of the payback method

Answer 10

• useful when technology is rapidly changing
  it is important to recover the cost of investment before new model or equipment is designed
• it is simple to use
• firms might adopt this method if they have cash flow problems

Question 11

disadvantages of payback method

Answer 11

• ignores the time value of money

- the method emphasizes on liquidity rather than profitability