investment appraisal

Question 1

investment appraisal definition

Answer 1

decides whether investing in capital items is worth it
the expected financial consequences

Question 2

payback period formula

Answer 2

time it takes to recover the cost of an investment - to reach break even

1. identify year its paid back
2. net return for that year / 12, 52, 365
3. cumulative return for year before / (2.)

Question 3

positives and negatives of payback

Answer 3

short term

ignores long term returns
hard to calculate

Question 4

ARR formula

Answer 4

average annual profit from investment

(net return / number of years) / initial cost of investment x 100

Question 5

positives and negatives of ARR

Answer 5

easy to calculate

doesn’t take into account inflation

Question 6

net present value

Answer 6

compares amount invested today to present value of future cash reciepts from an investment

net return x discount factor (for each year)
find total over the years

Question 7

positives and negatives of NPV

Answer 7

includes inflation and change over time

lengthy to work out especially if have lots of years