3.8 Investment appraisal

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Last updated 2:16 AM on 9/3/26
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5 Terms

1
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Investment appraisal

comparing the expected future cash flows of an investment with the initial expenditure on that investment. It assesses and justifies the capital expenditure allocated to a particular project

2
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Businesses want to analyse

  • how soon the investment will recoup the initial outlay

  • how profitable it will be


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data to collect to appraise an investment

  • Sales forecasts

  • Fixed and variable costs data

  • Pricing information

  • Borrowing costs  


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payback period

estimates the length of time required for an investment project to pay back its initial cost outlay. looking at how long a business takes to recover its principal investment from its net cash flows.


(initial outlay / net cash flow per period) = years/months it will take

<p>estimates the length of time required for an investment project to pay back its initial cost outlay. looking at how long a business takes to recover its principal investment from its net cash flows. </p><p></p><p>(initial outlay / net cash flow per period) = years/months it will take </p>
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average rate of return (ARR)

compares the average profit per year generated by an investment with the value of the initial capital cost. The average rate of return is calculated using the formula and is expressed as a percentage. This makes it easy to compare different investment options

((total retunrs - capital cost) / years of use ) / capital cost x100

<p><span>compares the average profit per year generated by an investment with the value of the</span> initial capital cost. The average rate of return is calculated using the formula and is expressed as a percentage. This makes it easy to compare different investment options</p><p>((total retunrs - capital cost) / years of use ) / capital cost x100</p>