Investment Appraisal - Payback Period Flashcards Preview

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Flashcards in Investment Appraisal - Payback Period Deck (7)
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1
Q

What is investment appraisal

A

The process of analysing whether investment projects are worthwhile

2
Q

What are the main methods of investment appraisal

A

-Payback period -Average rate of return -Discounted cash flow (NPV)

3
Q

What is meant by payback period

A

The time it takes for a project to repay its initial investment

4
Q

How do you calculate payback

A
  • Identify net cash flows for each period (e.g year) - Keep a running total of the cash flows: - initial investment = an outflow - When does the running total move from negative (outflow) to positive (inflow) - When the total net cashflow becomes positive that is the end of the payback period
5
Q

Benefits of using payback period

A
  • Simple and easy to calculate + easy to understand results - Focuses on cash flows - Emphasises speed of return; good for markets which are changing rapidly - Straight coward to compare competing projects
6
Q

Drawbacks of using payback period

A

-Ignores cashflows after payback has been reached - Takes no account of the ‘time value of money - May encourage short term thinking - Ignores qualitative aspects of a decision - Does not actually create a decision for the investment

7
Q

Calculate the payback for this question

A

To calculate precise payback:

3 years + (required amount to reach payback / total cash flow in during period)

3 + (75,000/150,000) = 3.5 years

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