investment appraisal

Question 1

3 methods of investment appraisal

Answer 1

1. payback period
2. average rate of return
3. discounted cash flow (NPV)

Question 2

payback period advantages and disadvantages

Answer 2

+ simple, easy to calculate
+ managing cash flow
+ effective when tech is changing at fast rate
- ignores flows of cash over lifetime of a project
- ignores total profitability

Question 3

ARR advantages and disadvantages

Answer 3

+ shows profit shoot
+ includes all projects cash flows
+ easy to compare w projects and costs of borrowing
- ignores timing of cash flow
- doesn’t allow effects of inflation on values of future cashflow

Question 4

NPV/DCF advantages and disadvantages

Answer 4

+ allows for impact of inflation on value of future cash flow
+ allows for effect of risk on estimated future cash flows
+ easy to compare w diff projects
- difficult to calculate
- discount factors could be incorrect so npv is inaccurate
- hard to set discount factors far into future

Question 5

special orders

Answer 5

differ due to price paid, quantity ordered and lead time