Investment Appraisal Flashcards
What is payback?
How long it takes you to get your money back
What is average rate of return?
This measures how much a business gets back from an investment expressed as a %
What is Net Present value?
Shows if the investment is worthwhile
What are 3 advantages of payback?
Good for risk management on project because it focuses on how long the investment will take to payback
Allows for forward planning
Easy to calculate
What is a disadvantage of payback?
Doesn’t allow for future condition e.g inflation or outside world
What are 2 advantages of ARR?
Very good for making comparisons with other returns
Easy to understand
What are 2 disadvantages of ARR?
Doesn’t show when you make a profit
Returns in future are less certain depending on market conditions
What are 2 advantages on NPV?
Values future monies so more accurate picture of the return
Gives a definite answer
What are 2 disadvantages of NPV?
How accurate are the discount factors.
If inflation is high then we may not get an accurate figure
How do you calculate payback?
Look at cost of investment
Add up till just before the cost
Look how much you have left
Divide that answer by next year
X12
How do you calculate net present value? (NPV)
Net Cash flow x discount factor
Add all answers ignoring the initial investment
Minus answer by the initial investment
How do you calculate average rate of return? (ARR)
Add all Net cash flows with the initial investment
Divide that by the number of years
Divide that by initial investment
X100
What is sensitivity analysis?
All about what if scenarios
Seeks to get answers based on variations of our initial forecasts e.g 10% more or less than expected
What is ARR comparing?
Comparing investments to what interest you might get in a low risk investment such as a bank account as well as comparing to borrowing
