Investment appraisal

Investment appraisal

helps businesses decide what projects to invest in, so that they get the best, fastest, least risky return for their money.

There is two main question firms try to answer to make good investments

How long will it take to get back the money that they spend

How much profit will they get for the investment

What are the three investment appraisal methods

Calculating payback period,

calculating the average rate of return,

discounted cash flows

investment appraisal methods use

predicted cash flows for different projects that a firm is considering

The predicted cash flows estimate how much

money the project will make and when, as well as how much will need to be spent on the project and when.

Because the methods use predictions

any incorrect predictions will mean that the calculations in the IA are wrong, which may result in a wrong choice