Investment Appraisal

Question 0

Appraisal Methods

Answer 0

Payback Net Present Value Internal rate of return (irr)

Question 1

Investment Appraisal Methods

Answer 1

Estimate the costs and benefits Select the appraisal method Use the appraisal method to ascertain if the project is worthwhile Decide to go ahead with the project

Question 2

Payback

Answer 2

Must be a set target payback period I.e. 3 yrs

Question 3

Calculate Cumulative Cash Flow into months

Answer 3

Cumulative cash flow from the previous year / Cash flow in current year X 12

Question 4

Calculation with constant annual cash flows

Answer 4

Initial Investment / Annual cash flow

Question 5

Advantages of Payback

Answer 5

Simple to understand Simple measure of risk Uses cash flows Allows greater importance to cash flows in earlier years

Question 6

Disadvantages of Payback

Answer 6

Not an absolute measure of profitability Ignores time value of money Does not take account of cash flows beyond the payback period

Question 7

Formula for Compounding

Answer 7

V=X(1+r)^n V= future value X= initial investment R= interest rate N= number of time periods

Question 8

Discounting Cash Flow Formula

Answer 8

1 / (1+r)^n

Question 9

Interest Rate

Answer 9

Means Cost of capital Discount rate Required return

Question 10

Net Present Value NPV

Answer 10

If NPV is positive it will increase shareholder wealth If faced with mutually exclusive projects, choose the project with the highest NPV

Question 11

IRR (Internal Rate of Return)

Answer 11

Question 12

Advantages of IRR

Answer 12

Considers the time value of money

% measurement easy to understand

uses cash flows

considers the whole life of the project

Question 13

Disadvantages of IRR

Answer 13

Not an absolute measure of profitability

Fairly complicated to calculate

Calculation only provides an estimate