Investment appraisal

Question 1

define investment appraisal

Answer 1

a way in which a business decides whether or not an investment project is worthwhile

Question 2

what are the 3 methods of investment appraisal

Answer 2

• Payback
• Average Rate of Return
• Net Present Value

Question 3

Explain how to calculate payback

Answer 3

using expected revenues/cashflow the business can figure out the time period it will take for them to recoup investment

Question 4

what are the pros and cons of payback

Answer 4

Pros
- simple to calculate
- can help prevent cashflow problems

Cons
- doesn’t measure the profitability
- is based off a forecast

Question 5

how does one calculate average rate of return (ARR)

Answer 5

average annual profit as a percentage of investment capital

Question 6

what are a pro and con of ARR

Answer 6

Pro
- measures profitability of investment

Cons
- its an average so not consistent over years

Question 7

How does one calculate net present value

Answer 7

multiply cashflows by discount factor and subtract cost of investment

Question 8

what is important to consider when calculating NPV

Answer 8

• timeframe
• source of data
• size of investment
• experience of workers
• economic and market forecast

Question 9

What is another key thing that needs to be assessed when considering investment options

Answer 9

• impacts on other stakeholders like consumers and employees