investment apprasial

Question 1

what is payback

Answer 1

method of investment appraisal where we calculate how long it takes for a project to recoup its initial investment

Question 2

what is the payback calc

Answer 2

(number of years) + investment leftover to pay / net cash flow of the next year > x12
x52

Question 3

what are the advantages to payback

Answer 3

-relatively easy to calculate
-good method to use if they have perilously experienced liquidity issues- getting money out of investment ASAP can be a main factor
-useful indicator of when money will be returned- new organisations need to make profits quickly
-once re paid the cash isn’t tired up.
-liquidity sensitive businesses

Question 4

limitation of payback

Answer 4

-payback may not consider the most lucrative years of profit, therefore when comparing two projects it may become inaccurate of the profits that can be made
-doesn’t take account of the net returns throughout the full life of the project.
-could be too simple and shouldn’t be used in isolation.

Question 5

what is ARR

Answer 5

average rate of return.
-% of annual return from an investment

Question 6

average annual profit calc

Answer 6

total revenue / no. of years of project

Question 7

what is ARR calc

Answer 7

average annual profit / cost of investment
x100 =%

Question 8

benefits of ARR

Answer 8

-businesses can compare ARRs of potential investments against each other
-comparing the investment vs bank-av bank return -4%
-very useful away of appraising the viability of an investment
-projects are very risky

Question 9

disadvantages of ARR

Answer 9

-doesn’t prioritise time like payback does, firms that are cash sensitive and prone to liquidity problems, may not be as useful
-not prioritising rapid repayment
-doesn’t account for the changes of inflation makes to the value of money

Question 10

what is net present value

Answer 10

form of investment appraisal which considers the change of value in the future- impacts of inflation

Question 11

how do calculate NPV

Answer 11

-multiplying the net cash flow by the discount factor

Question 12

usefulness of NPV

Answer 12

-useful if showing how valuable the return on an investment will actually be when the project is completed
-useful for comparing against target figures

Question 13

disadvantages of NPV

Answer 13

-not guaranteed that discount factors are accurate as it is a prediction
-projects maybe rejected as it doenst meet investment criteria however discount factor could be wrong— opportunity cost