Project Appraisal

Question 1

5 project appraisal methods

Answer 1

Payback method/period

Accounting rate of return

Net present value

Internal rate of return

Discounted payback period

Question 2

3 discounted methods

Answer 2

Net present value

Internal rate of return

Discounted payback period

Question 3

2 non-discounted methods

Answer 3

Payback method/period

Accounting rate of return

Question 4

How to calculate payback period (payback method)

Answer 4

Time (number of years) for a project to recover the original investment - based on expected cash flows

Question 5

How to calculate using NPV method

Answer 5

PV of cash outflows

Question 6

How to calculate using ARR method

Answer 6

Average annual profits
/
Average capital investment
x100%

Question 7

How to calculate discounted payback period

Answer 7

Time period required for break even factoring in time value of money

Question 8

How to calculate using IRR method

Answer 8

Interpolation - with a positive NPV and negative NPV - calculate where 0 NPV would fall

Question 9

How to calculate present value

Answer 9

Future value
/
(1 + rate of interest)^ n years

Question 10

What is best according to payback method

Answer 10

Quickest payback

Question 11

What is best according to ARR method

Answer 11

ARR must be higher than target rate of return, highest is best

Question 12

What is best according to NPV method

Answer 12

Project must have positive NPV, if multiple, highest is best

Question 13

What is best according to IRR method

Answer 13

Best differential with Cost of Capital

Question 14

What is best according to discounted payback method

Answer 14

Quickest payback

Question 15

4 advantages of payback method

Answer 15

Cash flows are used, not profits

Simple to calculate

Encourages quick return

Maximises liquidity

Question 16

3 disadvantages of payback method

Answer 16

Ignores cash flows after payback period

Ignores the time value of money

Ignores profitability

Question 17

3 advantages of ARR method

Answer 17

Simple to calculate

Focuses on profitability for entire period

Easy to compare with other projects

Question 18

4 disadvantages of ARR method

Answer 18

Factors such as project life are ignored

Time value of money not considered

Different variations are possible (before or after tax)

Ignores profits reinvested during profit period

Question 19

4 advantages of NPV method

Answer 19

Theoretically superior to all other methods

Considers time value of money

Based on cash flows, not profits (which vary on policy)

Takes all cash flows into account

Question 20

3 disadvantages of NPV method

Answer 20

Difficult to explain to managers

Calculation can be challenging and requires knowledge

Relatively complex compared to non-discounting methods

Question 21

4 advantages of IRR method

Answer 21

Cash flows rather than profits

Accounts for time value

Giver percentage rate comparable to target

Easier to understand than NPV

Question 22

4 disadvantages of IRR method

Answer 22

Ignores factors including project duration and size of investment

Not a measure in absolute terms - estimation

Most complex to calculate - spreadsheet needed for accuracy

May not lead to maximisation of profits when there is capital rationing

Question 23

3 advantages of discounted payback method

Answer 23

Considers time value

Uses cash flows

Determines recoverability of investment

Question 24

3 disadvantages of discounted payback method

Answer 24

Requires an estimate of the cost of capital

Ignores cash flows beyond discounted payback period

Complex calculations if multiple negative cash flows