Investment Appraisal

Question 1

What is investment appraisal?

Answer 1

The process of analysing whether investment projects are worthwhile

Question 2

Purpose of investment appraisal?

Answer 2

Determine whether an investment is worthwhile or a waste of resources

Question 3

What are the 3 main investment appraisal methods?

Answer 3

Payback
ARR
NPV (net present value)

Question 4

Payback definition?

Answer 4

Length of time required for an investment to recover its initial investment cost

Question 5

Payback calculation?

Answer 5

Investment cost - cash inflow per year
When cost is payed off go back a year and calculate the month it’s payed off by inflow/12 and adding until cost is covered .

Question 6

ARR definition ?

Answer 6

Average rate of return , measure profitability of any investment by a calculating average return over the lifetime of the investment

Question 7

ARR calculation

Answer 7

(Total net profit/No. of years)
______________________________ x100
Initial cost

Question 8

NPV definition

Answer 8

Net present value considers the value of money over time , realistic assessment of return in years ahead