Chapter 35 - Investment Appraisal

Question 1

Net Present Value

Answer 1

Today’s value of the estimated cash flows resulting from an investment.

Question 2

Investment Appraisal

Answer 2

Evaluating the profitability or feasibility of an investment project.

Question 3

Forecasted net cash flow

Answer 3

Forecast cash inflows less forecast cash outflows.

Question 4

Payback Period

Answer 4

Length of time it takes for the net cash inflows to pay back the original capital cost of the investment

Question 5

Additional months to payback

Answer 5

(Additional Net cash inflow needed / annual cash flow in year 3 )* 12 ( Months )

Question 6

Accounting Rate Of Return

Answer 6

Measures the annual profitability of an investment as a percentage of the average investment ( average capital cost ).

Question 7

ARR Formula

Answer 7

( Average Annual Profit / Average Investment ) * 100

Question 8

Criterion Rate

Answer 8

The minimum accounting rate of return that a business would accept before approving an investment.

Question 9

Discounted Cash Flow

Answer 9

The present-day value of a future cash flow.

Question 10

Qualitative factors and impact on investment decisions

Answer 10

• Impact on the environment and local community
• Refusal of planning permission
• Aims and objectives of the business
• impact on the workforce
• Acceptability of risk

Question 11

How is discounting Done?

Answer 11

• The higher the interest rate, the less value future cash has in today’s value
• The longer into the future cash is received, the less value it has today