Chapter 20: Investment appraisal

payback period

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

net present value (NPV)

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

investment appraisal

evaluating the profitability or desirability of an investment project

annual forecast net cash flow

forecast cash inflow minus forecast cash outflows

accounting rate of return (ARR)

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

ARR %

average annual profit/capital cost * 100

average annual profit

(total returns - capital cost)/number of years

criterion rate

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