7.8 Investment Appraisal Flashcards
What are the 3 calculations for investment appraisal?
Payback.
Average rate of return.
Net present value.
Calculation for exact payback period.
Amount needed/actual earned.
X12 for months.
X52 for weeks.
Why are payback calculations valuable?
Decision making - decide which investment will generate fastest profits.
What are the problems with payback calculations?
Doesn’t account for net profit - only concerned by speed of return.
What does payback show?
How quickly earnings will pay off initial investment.
What does ARR show?
Total net returns as a % each year.
What are the calculations for ARR?
Net return/years.
Average annual profit/initial investment x 100.
What are the advantages of ARR?
Decision making - which is the most beneficial investment or will a high interest rate bank savings account be more beneficial.
What are the disadvantages of ARR?
Doesn’t prioritise time.
