Investment Appraisal Flashcards
1
Q
Payback period formula
A
(Income required/net cash flow from next year) x12
2
Q
Average rate of return formula
A
(Average annual profit/ initial cost of investment) x 100
3
Q
Net present value formula
A
Net cash flow x discount factor
4
Q
Adv to payback period
A
Allow business to predict there revenue if they invested into an idea
5
Q
Disadv to payback period
A
It is based off of an estimation therefore cannot always be trusted
6
Q
Adv to ARR
A
Finds which investments are likely to lead to higher average annual profits
7
Q
Disadvantage to ARR
A
Ignores time and cash flow
8
Q
Advantages to NPV
A
Shows the value of profits, given inflation and interest rates effect on them
9
Q
Disadvantage to NPV
A
It’s based off an estimation and is difficult to predict
