Chapter 3.8 - Investment appraisal

Question 1

Average rate of return (ARR)

Answer 1

Calculates the average annual profit of an investment project, expressed as a percentage of the initial amount of money invested

Question 2

Cumulative net cash flow

Answer 2

The sum of an investment project’s net cash flows for a particular year plus the net cash flows for all previous years

Question 3

Discount factors

Answer 3

The number used to reduce the value of a sum of money received in the future to determine its present (current) value

Question 4

Discounted cash flow

Answer 4

Uses a discount factor to reduce the value of money received in future years because money loses its value over time

Question 5

Investment

Answer 5

Refers to capital expenditure or the purchase of assets with the potential to yield future financial benefits

Question 6

Investment appraisal

Answer 6

A financial decision-making tool that helps managers determine whether certain investment projects should be undertaken based mainly on quantitative techniques

Question 7

Net present value (NPV)

Answer 7

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

Question 8

Payback period (PBP)

Answer 8

An investment appraisal technique that calculates the length of time it takes to recoup (earn back) the initial expenditure on an investment project

Question 9

Principal/Capital outlay

Answer 9

The original amount spent on an investment project

Question 10

Qualitative investment appraisal

Answer 10

Refers to judging whether an investment project is worthwhile through non-numerical techniques, such as determining whether the investment is consistent with the corporate culture

Question 11

Quantitative investment appraisal

Answer 11

Refers to judging whether an investment project is worthwhile based on numerical (financial) interpretations