investment appraisal Flashcards
Average rate of return formula
Average Annual Return / project investment x100
how do you find average annual return
total return/ no.years of project
how do you calculate total return?
add all cash flows
what is investment appraisal?
the process of analysing whether investment projects are worthwhile
what is payback period
time it takes for a project to repay its initial investment
what is average rate of return
looks at the total accounting return for a project to see if it meets the target return
how do you find the payback period?
- identify net cash flows for each period
- keep running total of cash flows
- identify where cashflow goes from negative to positive
- last year of negative = year no
- cumulative / cashflow for year it becomes positive = months
what are the benefits of using payback period?
- simple and easy to understand results
- focuses on cash flows
- emphasises speed of return, good for markets which change rapidly
- straight forward to compare competing projects
what are the drawbacks of using payback period
-ignores cash flows after payback has been achieved
- takes no account of ‘time value of money’
-may encourage short - term thinking
- ignores qualitative aspects of decision
does not actually create a decision for investment
what is net present value
calculates money value now of all future cashflows of a project
how do you find present value
cash flow x discount factor
what is a discount factor
a percentage that is applied to future cash flows that takes account of the time value of money
how do you calculate NPV
- find present value
- add all together
