7.9a - Investment Appraisal (Payback) Flashcards
1
Q
Investment definition
A
The purchase of a non-current asset
2
Q
Why would a business invest?
A
- Replace or renew old assets
- Introduce new assets
- Help business achieve functional objectives
3
Q
What approach to decision making does an investment appraisal have?
A
Scientific
4
Q
What will a business look at when considering whether to invest or not?
A
- Initial cost
- Net return per annum
- How long asset will be used in the business
5
Q
Payback definition
A
An appraisal method that works out how long a business takes to pay for itself
6
Q
Cumulative returns definition
A
The running total of how much money the investment has cost/earned the business
7
Q
Payback formulae
A
- (Total left before payback is reached / net returns in year payback is reached) X 52
- Amount invested / annual net return
8
Q
Advantages of using payback:
A
- Simple and easy to calculate
- Easy to compare projects
- Emphasises speed of return
9
Q
Disadvantages of using payback:
A
- Ignores cash flows which arise after payback has been reached
- Takes no account of time value of money
- Ignores qualitative aspects of a decision
