Investment Appraisal

Question 1

Payback: calculation

Answer 1

1. Add cash flows until closest to project cost
2. Find difference of the number of months
3. Divide over due by next number down
4. X12 (round up to the month

Question 2

Payback: best option

Answer 2

Lowest

Question 3

ARR: calculation

Answer 3

1. Add up cash inflows for all years starting at year 1
2. Minus cost of project
3. Divide by number of years the project runs for
4. Divide by cost of project X100
5. Round to 2.dp, express as %

Question 4

ARR: best option

Answer 4

Highest

Question 5

Net present value: calculation

Answer 5

1. Multiply all cash inflows starting at year 1 by discount value
2. Put this into new present value column
3. Add all present value figures
4. Minus cost of project
5. Express results in £

Question 6

Net present value: best option

Answer 6

Highest

Question 7

Net present value: takes into account

Answer 7

What the project will be worth in the future

Question 8

Payback

Answer 8

How long it takes to repay the investment

Question 9

Payback: advatage

Answer 9

Easy to understand and calculate

Question 10

Payback: disadvantage

Answer 10

Doesn’t look at overall returns (little may be earned)

Question 11

ARR

Answer 11

Considers total returns of the project

Question 12

ARR: advantage

Answer 12

Can be compared to cost of borrowing

Question 13

ARR: disadvantage

Answer 13

Does not account for when returns occur