INvest Flashcards
what is investment appreasial
techniques designed to help a business judge the deserability of investnig in particular projects
what are the 3 investment appraisals
payback
average rate of return
net present value
what is payback
measures the time period required for the earnings of an investment to recoup the costs
what is average rate of return
calculates the annual percentage rate of return on each possible investment
Benefits of using payback
Cheap and easy to calculate
Negatives of using payback
Susceptible to short termism as you will pick the project that has the fastest results and may be a detriment in the long run / doesn’t care what happeneds after the payback
Calculate arr
Calculates the monetary value now of a projects future cash flow
How do you calculate ARR
Net value of returns (total returns-initial cost)/time taken= Average annual profit
Average annual profit/ initial investment 100
Why is ARR good
Shows a business whether investment is worthwhile by comparing it to current interest of banks and by comparing to other projects
Why is ARR bad
ARR doesn’t take into account inflation in the future and gives a false value of money projected to be returned in the future
How do you calculate payback
Find the point where all the money has been paid back
Year before paid back+ ans
the outstanding value / return = ans
X12 to get money months
x52 to get how many weeks
What are the key risks to consider when using investment appraisal
Risks and uncertainties
Length of the project
Source of the data
The size of the investment
The economic and market environment
How do you calculate NPV
Net present return x discount factor = NPV for year
Total NPV of all years = NPV of total investment
NPV shows the value of return taking into account economic factors
