Investment Appraisal

Question 1

Define an investment

Answer 1

An asset or item acquired to generate income or gain appreciation.

Question 2

Explain Investment appraisal

Answer 2

It
describes how businesses compare and evaluate investment projects in order to ascertain whether or not they will be
profitable.

Question 3

List the 4 methods to evaluate investment appraisal.

Answer 3

Payback period
Average rate of return
Net present value
Internal rate of return.

Question 4

Explain the payback period

Answer 4

The payback period is the time it takes for an investment to generate enough cash flow to recover its exact initial cost/investment.

Amount required
——————————– x12
Net cash flow per year

Question 5

Discuss some advantages and disadvantages.

Answer 5

-Projects that are paid back quickly can improve the firm’s growth and liquidity
-Payback is easy to calculate and interpret.
-It is said to be more objective since its focus is on the project’s cash flows rather than on profitability

-Payback is mostly a measure of liquidity and not of the overall worth of the project
-It does not take into account the expected life of the project
=It is not adjusted for the time value of money

Question 6

What is NPV?

Answer 6

Net present value represents the value that the firm obtains when it discounts its cash inflows and outflows of a
future investment project. It is calculated by multiplying the annual cash flows by the discount factor for a given interest rate.