Investment Appraisal

Question 1

Payback period

Answer 1

Sum invested/net cash per time period

Question 2

How many months

Answer 2

Outlay outstanding/ inflow of time period

Question 3

(ARR) Average Rate of return

Answer 3

Average annual profit / initial outlay x 100

Question 4

(NPV) net present value

Answer 4

Cash flow x di count factor = present value

Question 5

Ads and disads of payback period

Answer 5

Advantages
>simple to use
>firms may use if they have cash flow problems
>useful when tech changes rapidly

Disadvantages
>cash earned after payback period is ignored
>profitability of this method is overlooked

Question 6

Ads and disads of ARR

Answer 6

Advantages
>shows clearly the profitability
>can be compared to other investment flows

Disadvantages
>the effects of time on value of money is ignored

Question 7

Advs and disads of NPV

Answer 7

Advantages
>correctly accounts for future earnings
>discount rate can be changed as risk and conditions change in the market

Disadvantages
>more complex than others
>rate of discount is critical