EVALUATING INTEREST APPRAISAL Flashcards
What does investment appraisal do
A technique to assess the attractiveness of different potential investments that compares the expected cash outflows to expected coach inflows
What does payback do
Calculates the length of time in years and months before the initial cost of an investment
What does average rate of reryrn (ARR) do & the formula
Calculates average annual profit generated by a project of the initial investment
Formula = Average annual return / initial outlay X 100
What does net present value (NPV) do
Calculates the value of the expected returns of project in today’s terms
What are the pros of investment appraisal
Encourages a logical approach to making investment decisions
Range of methods allows timing and profitability of projects to be considered
Allows for alternative investments to be compared
What are the cons of investment appraisal
Makes assumptions about the future which determine the figures used in calculations
Considers only financial factors, when many more issues need to be taken into account
What is overall investment appraisal
Overall investment appraisal is a useful tool for managers to assess the financial viability of a project, but it should be used with other methods in order to make a final investment.
It’s a quantitative approach that doesn’t consider qualitative factors
