chapter 9 business appraisal

Question 1

what is the payback period

Answer 1

its the time taken for the project to pay back its initial cost

Question 2

advantages of payback period

Answer 2

• simple to use
• effective to use when technology is changing fast, in order to recover from investment as quick as possible
• helps manage cash flow

Question 3

disadvantages of using payback period

Answer 3

• ignores the cash flow over the lifetime of the project
• ignores the total profitability, only focuses on the speed at which the initial investment is replayed

Question 4

what is average rate of return

Answer 4

measures the average net return every year with the cost of the investment

Question 5

formula for ARR

Answer 5

(average annual profit) / (initial cost)

Question 6

advantages of ARR

Answer 6

• shows the profitability of the project
• includes the project cash flow
• easy to compare

Question 7

disadvantages of ARR

Answer 7

• ignores timing
• doesn’t allow the the effect of inflation

Question 8

what is discounted cash flow

Answer 8

is the method of investment appraisal that takes into account the time value of money by calculating the net present value (NPV)

Question 9

formula for NPV

Answer 9

discount factor x net cash flow each year

Question 10

formula for DCF

Answer 10

sum of all NPV - initial cost

Question 11

advantage of NPV

Answer 11

takes into account the time value of money

Question 12

qualitative factors affecting investment appraisal

Answer 12

• impact on staff
  can they handle the change (can be trained)
  there will be redundancies
• does it match the objectives and aims of the business
• state of economy
• ethical considerations
• sufficient funding