3.8 investment appraisal

Average rate of return (ARR)

calculates the average annual profit of an investment project, expressed as a percentage of the initial amount of money invested.

Cumulative net cash flow

the sum of an investment project's net cash flows for a particular year plus the net cash flows of all previous years.

Investment

capital expenditure or the purchase of assets with the potential to yield future financial benefits.

Investment appraisal

a financial decision-making tool that helps managers to determine whether certain investment projects should be undertaken based mainly on quantitative techniques.

Payback period (PBP)

an investment appraisal technique that calculates the length of time it takes to recoup (earn back) the initial expenditure on an investment project.

Principal

the original amount spent on an investment project.

Qualitative investment appraisal

judging whether an investment project is worthwhile through non-numerical techniques, such as determining whether the investment is consistent with the corporate culture.

Quantitative investment appraisal

judging whether an investment project is worthwhile based on numerical (financial) interpretations, namely the PBP and ARR methods.