3.8 Investment Appraisal

Used to access the attractiveness of various investments, helping the investors to decide.

Payback period: how much time the business needs to pay back its initial costs.

The cash flows are even=

Not even:

A picture containing text, screenshot, font, line Description automatically generated

Simple and fast but does not consider cash earned afterward.

The average rate of return (ARR): The annual net return on investment as a percentage of its capital cost.(Total returns – initial cots)/years of usage / initial cost *100%

Shows profitability, uses all cash flows, but doesn’t consider longer useful lives.

 

Net present value: Today’s value of the estimated cash flows resulting from an investment.

Year

CFs

DF

Pv of CFs

Balance

 

Positive----Yes; Negative-----No

The time value of money is considered, and all cash flows are included but it’s complicated.