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A Level Business Studies - Accounting And Finance > Investment Appraisal > Flashcards

Flashcards in Investment Appraisal Deck (8)
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Name 2 benefits of payback

1. Simple and easy to calculate
2. Focuses on cash which is normally scarce


Name 2 drawbacks of payback

1. Doesn’t show the ease/difficulty of borrowing
2. Doesn’t tell you how long the investment will last
3. Based on assumptions


What is accounting rate of return (ARR)

A calculation to work out the percentage yearly return of an investment


What is the 3 step calculation to work out ARR

1. Profit / number of years
2. ANS / investment (cost)
3. ANS x 100 = % yearly return


Name 2 benefits of ARR

1. % return can be compared to target % return
2. It focuses on profitability which is key for shareholders


Name 2 drawbacks of ARR

1. Doesn’t take into account cash flow only profits
2. Doesn’t look at the changing value of money due to inflation
3. Treats profits rising late into investment the same as ones rising early in investment when there are different needs


Define investment appraisal

Assessing whether investment projects are worthwhile


Define payback period

Payback period is the time it takes for a project to repay its initial investment