Investment Appraisal

What is investment appraisal?

The process of determining whether an investment meets the business' project objectives.

What are the uses of investment appraisals?

They help a business assess if an investment is profitable and allows comparisons between projects to decide the most suitable one.

What risks do investments carry for businesses?

Investments require financial commitment and involve risks in hopes of potential rewards or profits.

What information must businesses gather for investment appraisals?

Businesses need comprehensive information about any potential investments they are considering.

What are the three techniques included in investment appraisal?

Net Present Value, Average Rate of Return, and Payback.

What does a negative Net Present Value (NPV) indicate?

It suggests that a project will not make a business any money.

How is the Average Rate of Return (ARR) calculated?

It is calculated as (Average net return ÷ investment) × 100.

What does the shorter payback period indicate?

It indicates the quicker recovery of the original investment for a business.

Why might businesses with liquidity concerns choose projects with quicker paybacks?

To recover their original investment more rapidly and improve cash flow.

Why is comparing projects important in investment appraisal?

It helps businesses decide which projects align best with their needs and financial goals.