Section 3 - 3.8 investment appraisal

Question 1

The average rate of return (ARR)

Answer 1

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

Question 2

Discounted cash flow

Answer 2

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

Question 3

Investment

Answer 3

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

Question 4

Investment appraisal

Answer 4

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

Question 5

Net present value (NPV)

Answer 5

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

Question 6

The payback period (PBP)

Answer 6

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

Question 7

Qualitative investment appraisal

Answer 7

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

Question 8

Quantitative investment appraisal

Answer 8

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