Investment Appraisal

Question 1

Payback

Answer 1

Means calculating the amount of time to pay back the initial cost

1) Calculate in which year the cash flows will reach the initial cost
2) Calculate the cash flows needed to reach the initial cost in that year
3) Divide (2) by the net cash flows in that year and multiply by 12 to get the number of months

Question 2

ARR

Answer 2

it means analysing the profitability of an investment by calculating its annual % rate of return

1) Total Cash inflows - Total Cash Outflows (incl the initial cost)
2) Divide (1) by the number of years
3) Divide (2) by the initial cost and multiply by 100