Investment Appraisal Flashcards
1
Q
ARR (Annual Rate of Return)
A
AV annual profit / AV investment
2
Q
Payback Period
A
How many years to pay back?
3
Q
IRR (Internal Rate of Return)
A
=IRR(cell range)
4
Q
ARR - Pros
A
- Simple to calculate and understand
- Looks at entire life of project
- Reflects the way external investors judge the company
5
Q
ARR - Cons
A
- Ignores time value of money
- Based on profits
- Doesnt consider length of project
- No clear decision
6
Q
IRR - Pros
A
- Allows for time value of money
- Does not require exact cost of funds
- Easy to interpret
- Looks at entire project
7
Q
IRR - Cons
A
- Ignores size of investment
- Can give conflicting answer to NPV
- Assumes you can reinvest proceeds at IRR
8
Q
Payback - Pros
A
- Simple to calculate and understand
- Can use as initial screening tool
- Recognises importance of liquidity
9
Q
Payback - Cons
A
- Ignores time value of money
- Only considers the cashflows up to payback date
- Encourages short-termism
- No clear decision
