Investment Appraisal Techniques

Question 1

Accounting rate of return (initial)

Answer 1

ARR = Average annual profit / Initial investment x 100%

Question 2

Accounting rate of return (average)

Answer 2

ARR = Average annual profit / Average investment x 100%

where Average investment = 0.5 (initial investment + final scrap value)

Question 3

Terminal Value

Answer 3

TV = X (1 + r)^n

X = amount invested today
r = interest rate
n = number of years

Question 4

Present Value

Answer 4

PV = X * 1/(1 + r)^n

X = Amount invested in n years' time
r = interest rate
n = number of years

Question 5

Present Value in perpetuity

Answer 5

PV = X * 1/r

Question 6

Annuity factor

Answer 6

AF = 1/r (1 - 1/(1+r)^n )

Question 7

How to calculate the PV of a delayed annuity?

Answer 7

Calculate PV as normal then discount the resulting figure back to T0

Question 8

Calculation of estimated IRR

Answer 8

IRR = a% + [A/(A-B)] x (b-a%

a = lower rate of interest
b = higher rate of interest
A = NPV at lower rate of interest
B = NPV at higher rate of interest

Question 9

IRR of a perpetuity

Answer 9

= Annual inflow / Initial investment x 100%