Lecture 17 Flashcards
(11 cards)
Capital investment appraisal purpose
Evaluate an investment/project is financially worth
Compare options based on returns timings and risk
Key appraisal methods
Payback period, net present value, internal rate of return
Payback period formula and definition
Find when cumulative cash flows 10 positive and interpolate if partial year needed
Payback = years before recovery + (remaining amount / cash flow in recovery year)
Net present value formula
IRR formula
Use discount rate where NPV = 0
What’s the payback period?
The time it takes to recover after the initial investment
Why is net present value superior to payback?
It considers time value of money and all future cash flows
What does a positive net present value mean?
The project adds values and should be accepted
What are the internal rate terms and limitations?
They ignore the project scale and may introduce multiple internal rates of returns
Why is internal rates of returns still used despite flaws
Easy to interpret as a return rate
Why might payback mislead decision-maker?
It ignores long-term benefits and the time value of money 
