investment appraisal Flashcards
what is investment appraisal?
analysis conducted considering the profitability of an investment over the life of an asset
what is the purpose of investment appraisal?
it allows a business to consider whether there is enough value in a project they are considering to invest in
what is the payback period?
amount of time it takes to recover the cost of an investment or to hit breakeven
what is the payback period formula?
payback period = amount to be invested / estimated annual net cash flow.
what is the average rate of return?
average annual amount of cash flow generated over the life of an investment
what is the average rate of return formula?
annual net profit / initial cost of investment
what is discounted cash flow?
valuation method used to estimate value of an investment based on expected future cash flows
what is the discounted cash flow formula?
the cash flow period / (1 + r (interest rate) ) plus the same for the following period
what is net present value?
present value of the cash flows at the required rate of return of your project compared to your initial investment.
what is the net present value formula?
net cash flow at the time / (1 plus discount rate)time of the cash flow
what are the advantages of investment appraisal?
what is a special order?
a specific order for a product that is not usually given out by a business
what is a special order?
a specific order for a product that is not usually given out by a business
why would a business accept a special order?
-build relationship with customer
-may gain new customers through word of mouth
(work out contribution to assess quantitative benefits)
