investment appraisal

Question 1

what is meant by “payback period”?

Answer 1

how long it takes to recoup you original investment

Question 2

how do you work out the pay back period?

Answer 2

step 1. add up each year until you find the year or two years that the initial investment will be between.
step 2. you divide the remaining amount needed to be paid back by the income in the next period.
step 3. multiply the answer by 365 (days) or 12 for months.

Question 3

what is the accounting rate of return / ARR?

Answer 3

average retrun each year as a percentage for the investment.

Question 4

how do you calculate ARR?

Answer 4

1. proper profit = add all the figues together and minus the initial investment
2. average it = the answer to the previous and divide it by how many years are there
3. divide that answer by the cost ( initial investment)

Question 5

what is the NPV?

Answer 5

net present value = tells you the value of your investment over time as it takes into account inflation.

Question 6

how do you work out NPV?

Answer 6

multiply the net cash flows for each year by the discount factors.