Investment Appraisal Flashcards
Investment Appraisal
This is a method to evaluate planned investment by the business and measure its potential value.
Payback period
Average Rate of Return
Net Present Value
Payback Period Def
This is the time taken for the project to pay back the initial outlay
Payback Period Formula
Income needed in Period / Contribution Per Month
Advantages of Payback
-Easy to Calculate and Use
-Helps with Cashflow forecasting
Disadvantages of Payback
-Ignores what happens after the Payback Period
-May encourage a short-term attitude
Average Rate of Return Def
This calculates the average annual profit of an investment project, expressed as a percentage of the sum initially invested.
Average Rate of Return Formula
(Average Annual Return / Initial Outlay) x 100
Advantages of Average Rate of Return
-Focuses on Profitability
-Easy to make comparisons
Disadvantages of Average Rate of Return
-Ignores Cash flow Timings
-Doesn’t account for inflation
Net Present Value Def
The value of future money if you had it now. After inflation and potential for earning interest have been considered.
Advantages of Net Present Value
-Future earnings are adjusted to present values
-Inflation is considered for future cash flows
-Reduces the effect of risk
Disadvantages of Net Present Value
-Complex to Calculate
-Discount Factors could be incorrect
-Interest Rates estimations could be inaccurate
Discount Factors
Used to calculate NPV. They show how much future values will be discounted to provide a present value
Internal Qualitative Factors
Is the investment in line with the strategy and objectives of the business?
Impact on Staff
Impact on existing products
External Qualitative Factors
State of the economy (boom/recession)
Actions of competitors
Ethical Considerations
