IB Bus. Investment Appraisal test

On Test (15 marks): Calculate Payback Period and Average Rate of Return Define PBP and ARR Evaluate various investment options (using appropriate terminology and relating to the case, including actual numbers

Payback period example

ARR example

define payback period

amount of time needed for an investment project to earn enough profits to repay the initial cost of the investment

define average rate of return

calculates the average profit on an investment project expressed as a percent of the amount invested

payback period formula

initial investment cost / contribution per month

How to evaluate investment options

-ARR vs PBP (time to get it back)

-ARR vs bank interest rate

ADD “but we should also consider qualitative factors such as __”

What is quantitative and qualitative factor and give an example of each

Quantitative (numerical characteristics)-

1. PBP

2. ARR

Qualitative (non-numerical characteristics)-

1. Projections- gut feelings

2. Objectives- firm’s priorities

3. Risk Profile

4. State of the Economy

5. Corporate Image

6. Human Relations- morale

7. External Shock- natural disasters, crisis