Investment appraisal

Question 1

Accounting rate of return (ARR) (initial)

Answer 1

ARR = (Average annual profit / initial investment) x 100%

Question 2

Accounting rate of return (ARR) (average)

Answer 2

ARR = (Average annual profit / Average investment) x 100%

Question 3

Time value of money: future value

Answer 3

FV = x(1+r)n

Question 4

Present value of future cash flow

Answer 4

PV = X x 1/(1+r)n

Question 5

Annuity

Answer 5

PV = X x 1/r (1 - 1/(1+r)n)

Question 6

Perpetuity

Answer 6

PV = X x 1/r

Question 7

Payback period

Answer 7

Initial payment / annual cash flow

Question 8

perpetuities starting at time 0

Answer 8

PV = X x (1 + 1/r)

Question 9

Internal rate of return (IRR)

Answer 9

IRR = a + NPVa / (NPVa - NPVb) x (b-a)

Question 10

IRR of perpetuity

Answer 10

Annual inflow / initial investment x 100%