investment appraisal Flashcards
what is investment appraisal
it covers a range of techniques designed to see if investment is worthwhile
what is payback
time it takes to repay initial investment
how to calculate payback
no of complete years + total required in year to payback / total cash flow that year
what are the advantages of payback
simple
takes into account cash flow
easy for comparison
what are the disadvantage of payback
doesnt measure profitability
doesnt take into account value of money
doesnt acknowledge what happens after payback
what is average rate of return
total accounting return of the project to see if it meets target level of return
how to calculate ARR
Average annual return/ initial investment X 100
what are the advantages of ARR
Includes cash flow
easy to compare
looks at profitability
what are the disadvantages of ARR
doesnt take into account time value of money
what is Net present value
calculates what monetary value now of future cash flow
how to calculate net present value
cash flow X discount factor
add together all results and minus investment
what are the positives of net present value
takes into account time value of money
all cash flow involved
easy
what are the negatives of net present value
complicated method
difficult to determine the discount factor
