Investment appraisal Flashcards
What is the nature and purpose of investment appraisal
The purpose of investment appraisal is to help decision makers make informed decisions about investing in new projects, expanding into new markets, or acquiring new businesses. By evaluating the potential financial performance of an investment project, decision makers can determine whether the investment is likely to generate sufficient returns to justify the investment.
How to calculate and interpret the pay back period
Payback Period = Initial Investment / Annual Cash Inflows
How to calculate and interpret the average rate of return (ARR)
ARR = (Total Cash Inflows - Initial Investment) / Initial Investment / Number of Years
How to calculate and interpret net present value (NPV)
NPV = (Total present value of expected cash inflows - Initial Investment) / (1 + discount rate)^n
how do quantitative aspects of investment appraisal affect a business
Determining project feasibility: Investment appraisal involves analyzing the financial viability of a proposed investment opportunity, taking into account factors such as expected returns, costs, and risks. The results of the appraisal can help to determine whether the project is feasible and whether it is worth pursuing.
Allocating resources: Investment appraisal provides a basis for making decisions about resource allocation. If the results of the appraisal indicate that a proposed investment opportunity is not viable, the business can redirect its resources to more promising opportunities.
Evaluating risk: Investment appraisal provides a basis for evaluating the level of risk associated with an investment opportunity. This information can be used to make decisions about which projects to pursue and how much to invest in each project.
Improving decision making: Investment appraisal provides a systematic and structured approach to evaluating investment opportunities, which can improve the quality of decision making. This can help the business to avoid making costly mistakes and to maximize its returns on investment.
explain how do qualitative aspects of investment appraisal affect a business
Determining project feasibility: Investment appraisal involves analyzing the financial viability of a proposed investment opportunity, taking into account factors such as expected returns, costs, and risks. The results of the appraisal can help to determine whether the project is feasible and whether it is worth pursuing.
Allocating resources: Investment appraisal provides a basis for making decisions about resource allocation. If the results of the appraisal indicate that a proposed investment opportunity is not viable, the business can redirect its resources to more promising opportunities.
Evaluating risk: Investment appraisal provides a basis for evaluating the level of risk associated with an investment opportunity. This information can be used to make decisions about which projects to pursue and how much to invest in each project.
Improving decision making: Investment appraisal provides a systematic and structured approach to evaluating investment opportunities, which can improve the quality of decision making. This can help the business to avoid making costly mistakes and to maximize its returns on investment.
What is the usefulness of different methods of investment appraisal to a business and its stakeholders
Net Present Value (NPV): NPV is a widely used method of investment appraisal that takes into account the time value of money, by discounting expected future cash flows to their present value. NPV is useful for evaluating the profitability of an investment and for making decisions about which projects to pursue, as it considers both the magnitude and timing of expected cash flows.
Internal Rate of Return (IRR): IRR is a measure of the expected rate of return from an investment, and is used to evaluate the profitability of an investment and to make decisions about which projects to pursue. IRR is useful for comparing investment opportunities with different expected cash flows, as it provides a common basis for comparison.
Benefit Cost Ratio (BCR): BCR is a simple and straightforward method of investment appraisal that compares the expected benefits of an investment with its costs. BCR is useful for evaluating the financial viability of an investment and for making decisions about which projects to pursue, as it provides a clear and concise measure of the expected return on investment.
Payback Period (PP): PP is a measure of the time it takes to recover the initial investment, and is used to evaluate the liquidity and risk of an investment. PP is useful for evaluating the risk of an investment and for making decisions about which projects to pursue, as it provides a quick and simple measure of the expected recovery of the investment.
Accounting Rate of Return (ARR): ARR is a measure of the expected return on investment, calculated as a percentage of the average investment over the life of the project. ARR is useful for evaluating the profitability of an investment and for making decisions about which projects to pursue, as it provides a simple and straightforward measure of the expected return on investment.
recommend and justify business investments based on quantitative and qualitative investment appraisal
Define the investment opportunity: Clearly define the investment opportunity, including the nature of the investment, the expected cash flows, and the timeline for the investment.
Conduct a quantitative investment appraisal: Use methods such as Net Present Value (NPV), Internal Rate of Return (IRR), Benefit Cost Ratio (BCR), Payback Period (PP), and Accounting Rate of Return (ARR) to evaluate the financial viability of the investment.
Conduct a qualitative investment appraisal: Consider non-financial factors such as market conditions, competition, regulatory environment, technology, and the impact on the business and its stakeholders.
Weigh the results of the quantitative and qualitative appraisals: Combine the results of the quantitative and qualitative appraisals to form a complete picture of the investment opportunity.
Make a recommendation: Based on the results of the quantitative and qualitative appraisals, make a recommendation about whether to pursue the investment or not.
Justify the recommendation: Clearly explain the basis for the recommendation, including the results of the quantitative and qualitative appraisals and the impact on the business and its stakeholders.
