Investment Appraisal Techniques

Flashcards for investment appraisal techniques.

__ is defined as the quantitative techniques used in evaluating the viability or attractiveness of an investment proposal.

Investment appraisal

Investment appraisal assesses and justifies the __ allocated to a particular project.

capital expenditure

Investment appraisal assists businesses in __ different investment projects.

comparing

__ is the length of time required for an investment project to pay back its initial cost.

Payback period

The __ the payback period, the better it is for investing for the business.

shorter

Payback period = initial investment cost / __.

annual cash flow from investment

The payback period is a short-term measure of quick returns on investment, so it is less prone to inaccuracies of __ forecasting.

long-term

A disadvantage of the payback period is that it ignores the __ of the investment and only focuses on how fast it will pay back.

overall profitability

__ measures the annual net return on an investment as a percentage of its capital cost.

Average rate of return

Average rate of return (ARR) = ((total returns - capital cost) / years of usage) / __ x 100

capital cost

Unlike the payback period, the ARR considers __ in a business.

all cash flows

A disadvantage of ARR is that since it considers a longer time period, there are likely to be __.

forecasting errors

__ is the difference in the summation of present values of future returns and the original cost of investment.

Net present value (NPV)

__ uses a discount factor that converts future values into their present value.

Discounted cash flow

NPV = total present values - __.

original cost

An advantage of NPV is that the opportunity cost and __ is put into consideration in its calculation.

time value of money

A disadvantage of NPV is that it is more complicated to calculate than and .

payback period, average rate of return