Chapter 21 (Investment appraisal)

Question 1

Average rate of return (ARR)

Answer 1

Average annual profit from an investment project (as a percentage of the initial amount invested)

Question 2

Cumulative net cash flow

Answer 2

Sum of an investment project’s net cash flow from the beginning of the project till now

Question 3

Discount factor

Answer 3

The number used o reduce the future value of money

Question 4

Discounted cash flow

Answer 4

Using the discount factor to reduce the value of money received in the future

Question 5

Investment

Answer 5

Purchasing an asset with the potential to gain financial benefits

Question 6

Investment appraisal

Answer 6

Decision making tools to help with financial decision-making

Question 7

New present value (NPV)

Answer 7

The difference between the total discounted net cash flow and the initial cost of the investment

Question 8

Pay back period (PBP)

Answer 8

The amount of time it takes to recoup the initial expenditure on an investment project

Question 9

Principal

Answer 9

The original amount spent on the investment project

Question 10

Qualitative investment appraisal

Answer 10

PORSCHE (projections, objectives, risk profile, state of the economy, corporate image, human relations, external shocks)

Question 11

Quantitative investment appraisal

Answer 11

ARR (average rate of return), NPV (net present value), PBP (payback period)