investment apprasial

What is it ?

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

Payback period

Time it takes for a project to make enough money to pay back intial investment

Managers compare payback periods of different projects to choose which project to go ahead with - usually want the shortest period to get their money back

Payback period formula

Amount invested/ annual net cash flow

Advantages payback period

Easy to caluiclate and understand

Very good for high tech projects - technology needs to be sure that they’ll will get their INTIAL investment back before the products stip generating return

• technology becomes obsolete

Disadvantages of payback periods

It ignores cash flow after payback

It ignores the time value of money

Average rate of return ARR

Compared net return with the level of investment

Net return=income of the projects- costs including the investment

The high the ARR the more favourable the project Will appear

ARR formula

Expressed as a %

Average net return/ investment X100

Advantages of ARR

Easy to calculate and understand

Takes account of all projects cash flows doesnt stop after a certain point in return - payback does

Disadvantages of ARR

Ignores timing of the cash flow - firm might put more vlaue on money that they get sooner rather than later

Ignores time value of money