Investment Appraisals.

Question 1

What is an investment appraisal

Answer 1

An investment appraisal is a variety of methods used to calculate how long it takes for a particular investment/asset, to return and recoup its value in profit.

Question 2

Payback Period and how to calculate

Answer 2

The time taken for the investment to recoup e.g. 3 years 2 months.

To calculate:

Subtract the profit from the initial investment until you make a profit, this is the year, then divide the profit by the initial investment to get the weekly figure.

Question 3

Average rate of return and how to calculate it.

Answer 3

Average rate of return is the average investment given as a percentage.

Total net profit/ Number of years
—————————————— X100
Initial cost

Given as a percentage value.

Question 4

Net present value and how to calculate.

Answer 4

Net present value calculates the average rate of return and accounts for the value of money.

Cash flow/ initial investment

Question 5

Advantages of payback

Answer 5

Easy and simpler to use

Gives an accurate time

Question 6

Disadvantages of payback

Answer 6

Doesn’t account for the value of money

Ignores other external factors such as maintenance costs.

Question 7

Average rate of return advantages

Answer 7

Percentage is more comparable.
More accurate
Focuses on profitability which is a key issue for a business.

Question 8

Disadvantages of average rate of return.

Answer 8

Doesn’t acknowledge cash flow and immediate effects

Doesn’t acknowledge external factors such as natural disasters.

Question 9

Net present value advantages

Answer 9

Accounts for the value of money

Uses cash flow and not net earnings

Question 10

Net present value disadvantages.

Answer 10

Doesn’t account for urgent cash flow impact such as machines breaking and natural disasters.
Complicated compared to payback.