Investment Appraisal Techniques Flashcards
Don’t include depreciation
In payback BUT DO INCLUDE IT in accounting rate of return
How do you work out average investment?
It is 0.5 x (initial investment PLUS final or scrap value)
What is an annuity?
It is a series of identical cash flows for a number of years
How do you work out the present value of a perpetuity?
Cash flow / annual interest rate
How do you calculate the NET TERMINAL VALUE of a project from the NET PRESENT VALUE of a project?
NTV = NPV x decimal interest rate ^ number of years
What is a discounted payback period?
It is the time that it will take before a project’s cumulative NPV turns from being negative to positive.
What is the IRR interpolation formula?
IRR = a + (NPVa / NPVa - NPVb) * (b - a)
a is the first discount rate giving NPVa - this should be the lower discount rate which gives the higher NPV
b is the second discount rate giving NPVb
What is IRR?
The internal rate of return - it is the discount rate at which the NPV is zero, or the annual return (in present value terms) that a project is expected to achieve.
True or false, the accounting rate of return method of project appraisal usually gives too little weight to cash flows which occur late in a project’s life
False, ARR places equal value on all cash flows throughout a project’s life. NPV places less value on later cash flows
True or false, for a project with a unique internal rate of return greater than the opportunity cost of capital, the IRR method of project appraisal usually gives too little weight to cash flows which occur late in the project’s life
True
Which is the best investment appraisal technique out of payback, NPV, IRR and accounting rate of return?
NPV
A project‘s IRR is the return at which the net present value (NPV) of the cash flows is zero. The IRR is therefore independent of a company‘s cost of capital. The revision to the cost of capital by the project analyst will therefore not impact on the IRR, hence there is no change.
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WHEN THERE ARE KG SHORTAGES, work out the contribution per KILO !!!
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Which one out of the IRR and payback period do not involve the cost of capital in their calculation?
Neither do
Remember to get your cash flow signs the right way around when doing calcs
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