3.8 Investment Appraisal

In terms of business accounts and finance, an investment is

• Having retained earnings receiving interest in the bank
• Purchasing new capital equipment
• Returning dividends to shareholders
• Financing a long-term bank loan paying interest

The quantitative techniques used to calculate the financial costs and benefits in investments?

• Investment Appraisal
• Cash Flow Forecast
• Payback period
• Investment

The Payback Period (PBP) will always select the investment that

• Gives the highest rate of return
• Returns the cost of investment first
• Has the highest total net cash flow

The Average (or Accounting) Rate of Return Method of Investment Appraisal will always select..

• The project with the lowest cost
• The project with the highest total net return
• The project with the highest average rate of return

The main advantage of ARR

• easy comparisons
  
• money
• profit
• ignores timing of cash inflow

The greater net cash flows, the faster the payback period

• TRUE
• FALSE

The following are all methods of investment appraisal, EXCEPT

• Payback period
• Balance sheet return
• Net present value using discounted cash flows
• Average rate of return

Minimum level set by management for investment appraisal results for a project to be accepted

• Is the definition of investment appraisal
• Is the definition of criterion rate or level
• Is the definition of annual forecasted net cash flow
• Is the definition of payback period

Which of the following is NOT relevant to the use of the NPV method of investment appraisal?

• It relies on discounted cash flows
• It’s expressed as a percentage for easier comparison
• Its value will fall if interest rates rise
• A financially viable investment has a positive value

Cash flows are discounted for various reasons, but NOT because of

• Time
• Inflation
• Interest rate
• Risk and uncertainty