Section 3 - 3.8 investment appraisal Flashcards
The average rate of return (ARR)
Calculates the average annual profit of an investment project, expressed as a percentage of the initial sum of money invested
Discounted cash flow
Uses a discount factor (the inverse of compound interest) to reduce the value of money received in future years because money loses its value over time
Investment
Refers to the purchase of assets with the potential to yield future financial benefits e.g.upgrading computer systems or the purchase of property
Investment appraisal
There’s a financial decision making tool that helps managers to calculate weather certain investment project should be undertaken based mainly on quantitive techniques
Net present value (NPV)
Calculates the total discounted net cash flow minus the initial cost of an investment project. If the NPV is positive, then the project is viable on financial grounds
The payback period (PBP)
Is an investment appraisal technique that calculates the length of time needed to recoup (earn back) the initial expenditure on an investment project
Qualitative investment appraisal
Refers to judging weather investment project is worthwhile through nonnumerical means e.g. is the investment consistent with the corporate culture
Quantitative investment appraisal
Refers to judging whether an investment project is worthwhile based on numerical interpretation
i.e. the PBP, ARR and NVP