Section 3 - 3.8 investment appraisal Flashcards

1
Q

The average rate of return (ARR)

A

Calculates the average annual profit of an investment project, expressed as a percentage of the initial sum of money invested

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2
Q

Discounted cash flow

A

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

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3
Q

Investment

A

Refers to the purchase of assets with the potential to yield future financial benefits e.g.upgrading computer systems or the purchase of property

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4
Q

Investment appraisal

A

There’s a financial decision making tool that helps managers to calculate weather certain investment project should be undertaken based mainly on quantitive techniques

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5
Q

Net present value (NPV)

A

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

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6
Q

The payback period (PBP)

A

Is an investment appraisal technique that calculates the length of time needed to recoup (earn back) the initial expenditure on an investment project

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7
Q

Qualitative investment appraisal

A

Refers to judging weather investment project is worthwhile through nonnumerical means e.g. is the investment consistent with the corporate culture

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8
Q

Quantitative investment appraisal

A

Refers to judging whether an investment project is worthwhile based on numerical interpretation
i.e. the PBP, ARR and NVP

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