investment appraisal Flashcards
payback period=
amount of time an investment requires to generate cash flows to pay back initial equity investment(add all cash flows until equals intial investment)
IGNORES TIME VALUE OF MONEY
discounted payback period
same as payback period but does consider TIME VALUE OF MONEY
its the time required for an investment of future cash flows to equal initial cost
Accounting rate of return
a percentage of rate of return expected on an investment as compared to initial investment cost
DOES NOT CONSIDER TIME VALUE OF MONEY
NPV
difference between the present value of the net cash flows of an investment(discounted at the required rate of return) and the initial investment
internal rate of return
the discount rate that makes the NPV equal 0
to work out its trial and error against the discount rate
advantages and disadvantages of IRR
+ closely related to NPV, easy to understand
- may result in multiple answers, can lead to incorrect decisions
discount rate
it refers to the interest rate used in DCF analysis to determine the present value of future cash flows to a specific company
what does diiscount rates take into account
the time value of money
risk of future cash flows(higher the risk, the higher the discount rates)
influencing factors of discount rates:
weighted average cost of capital
inflation rate
risk premium
why does inflation happen?
market factors
government factors
external factors
scenario anaylsis
the determination of what happens to NPV estmiate when we ask what if questions(best/worst case scenario)
sensitivity analysis
investigation of what happens to NPV when only 1 component of project cash flow is changed
-its v useful at identifying the variables that deserve more attention
simulation analysis
a combination of scenario and sensitivty analysis
