Investment Appraisal Flashcards
(7 cards)
What is the formula for Net Present Value (NPV)?
NPV = Σ CFₜ / (1 + r)ᵗ; accept if NPV > 0
Examples in Week 7–10 pack
What is the Internal Rate of Return (IRR)?
Discount rate that sets NPV = 0
What is the Payback period?
Time until cumulative cash flows = initial outlay
What is the formula for Accounting Rate of Return (ARR)?
ARR = Avg annual profit ÷ Avg investment
What is a Defined Contribution (DC) plan?
Employer’s obligation limited to agreed contributions; investment risk on employee
In a DC plan, the retirement benefits depend on the contributions made and the performance of the investments chosen by the employee.
What is a Defined Benefit (DB) plan?
Employer promises a specified benefit; bears actuarial & investment risk
In a DB plan, the retirement benefit is predetermined, providing more certainty for the employee regarding their future retirement income.
