Chapter 9 - Investment Appraisal

Question 1

What is the purpose of an investment appraisal?

Answer 1

Assess viability
Financial
Legal
Environmental
Social
Operational
Risk

Financial or against other projects

Question 2

Name three investment appraisal techniques

Answer 2

Payback
Net Present Value
Internal Rate of Return

Question 3

Discuss payback

Answer 3

How long until paid back

Question 4

Adv and Disadv of payback

Answer 4

Simple
Projected income
Amount of time

Doesn’t account for post payback
Changing value over time

Question 5

Discuss NPV

Answer 5

Value today based on income generations of the future

Question 6

Adv and Disadv of NPV

Answer 6

Considers future income beyond payback
Changing value over time

Not simple
Difficult to communicate
Only used for like for like

Question 7

Discuss Internal Rate of Return

Answer 7

Makes present value of costs equal to the present value of benefits, meaning the NPV is zero.

Your IRR is the percentage at which the NPV is zero.

Question 8

What are the two Discounted Cash Flow analysis techniques

Answer 8

Net Present Value

Internal Rate of Return

Question 9

Adv and Disadv of IRR

Answer 9

Considers profit beyond payback
Percentage enables comparison between projects

Not simple
Difficult to communicate
Only money based not other value