investment appraisal

Question 1

investment appraisal what is it

Answer 1

how a business assess whether an investment project is worth doing

Question 2

how to calc new cash flow

Answer 2

cash in- cash out

Question 3

3 main methods

Answer 3

1. payback period -
2. average rate of return
3. net present value

Question 4

first step

Answer 4

payback method
- how long it takes to recover the og investment

formula
amount left to recover/ cash flow that year

Question 5

second step

Answer 5

average rate of return
- measures average annual profit from the investment as a percetange from the original investment

formula
average annual profit/ initial investment x 100

Question 6

3rd step

Answer 6

net present value
- takes th time value of mo new into account by discounting future cash flows

formula
npv= total present value of cash inflows - initial investment

Question 7

payback evaluation

Answer 7

the longer payback period = greater degree of risk
- doesn’t take into account what happens after payback

Question 8

average rate of return evaluation

Answer 8

allows for easy comparison with other forms of investment

Question 9

net present value evaluation

Answer 9

calculates total return on an investment taking into account time value of money

Question 10

factors influencing investment decision

Answer 10

to expand
gain market share
competitive adv

Question 11

sensitivity analysis

Answer 11

process of systematically changing variables to calc range of possible financial outcoemes