Investment appraisal

Question 1

Investment appraisal

Answer 1

evaluating the profitability or desirability of an investment project.

Question 2

Annual forecasted net cash flow

Answer 2

forecast cash inflows minus forecast cash outflows.

Question 3

Payback period

Answer 3

length of time it takes for the net cash inflows to pay back the original capital cost of the investment.

= (additional net cash inflow needed / annual cash flow in year x )* 12

Question 4

Accounting rate of return

Answer 4

measures the annual profitability of an investment as a percentage of the initial investment.

ARR(%) = annual profit (net cash flow) × 100 / initial capital cost

OR

ARR(%) = annual profit (net cash flow) × 100 / average capital cost

where the average capital cost =
initial capital cost – residual capital value / 2

Question 5

Net present value (NPV)

Answer 5

today’s value of the estimated cash flows resulting from an investment.