Chapter 20: Investment appraisal

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payback period

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8 Terms

1

payback period

length of time it takes for the net cash inflows to pay back the original capital cost of investment

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2

net present value (NPV)

today’s value of the estimated net cash flows resulting from an investment

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3

investment appraisal

evaluating the profitability or desirability of an investment project

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4

annual forecast net cash flow

forecast cash inflow minus forecast cash outflows

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5

accounting rate of return (ARR)

measures the annual profitability of an investment as a percentage of the capital cost

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6

ARR %

average annual profit/capital cost * 100

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7

average annual profit

(total returns - capital cost)/number of years

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8

criterion rate

the minimum accounting rate of return (ARR) that a business would accept before approving an investment

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