3.8 Investment appraisal

Payback period

Payback period

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

Investment appraisal

________: evaluating the profitability or desirability of an investment project.

Net present value

________ (NPV): todays value of the estimated cash flows resulting from an investment.

Investment appraisal

evaluating the profitability or desirability of an investment project

Payback period

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

Net present value (NPV)

todays value of the estimated cash flows resulting from an investment

Investment appraisal

Evaluating the profitability or desirability of an investment project

Initial capital cost of the investment; estimated life expectancy; residual value of the investment; forecasted net returns or net cash flows from the project

4 things that quantitative investment appraisal requires

Payback period; average rate of return; net present value using discounted cash flows

3 methods of quantitative investment appraisal

Payback period

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

Average rate of return (ARR)

ARR measures the annual profitability of an investment as a percentage of the initial investment

Present value of a future sum of money depends on two factors

The higher the interest rate, the less value future cash has in today's money and the longer into the future cash is received, the less value it has today

Net present value (NPV)

Today's value of the estimated cash flows resulting from an investment