Investment appraisal: evaluating the profitability or desirability of an investment project.
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Quantitative investment appraisal requires:
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Methods of quantitative investment appraisal:
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Net present value (NPV): today’s value of the estimated cash flows resulting from an investment.
Example:
NPV = Total discounted cash flows - Original investment
→ $11,940 - $10,000 = $1,940
→ The project earns $1,940 in today’s money values. So, if the finance needed can be borrowed at an interest rate of 8% or less, the investment will be profitable.
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