Investment Appraisal quiz

What does investment appraisal describe?

• whether a project is likely to be profitable or not

• projects cash inflows

• how a business may evaluate a project

• how to measure the net return each year

Give an advantage to the payback period method:

• Makes use of discounted cash flow

• Simple to use

• Takes into consideration interest rates

What is the formula for average rate of return? (ARR)

• amount required / net cash flow in year

• actual sales - trend

• net return per annum / cost x 100

____ is the amount of money spent when setting up a new venture

What is ANOTHER way the payback period can be calculated?

• initial investment cost / annual cash flow from investment

• cash flow + cash inflows

• average profit / capital cost x 100

• calculate the cumulative net cash flow

What is the first stage in calculating the ARR (average rate of return)

• subtract cost investment

• calculate as % of initial cost

• divide by lifespan

What is the disadvantage of net present value (NPV)?

• Can't be chanted to suit external factors

• does not take into account the future values of cash inflows

• the discount rate influences the NPV a lot

What is an advantage of net present value?

• Less complicated than calculating payback

• Time value of money is considered

• Estimation of length of time required of an investment

Year 0 shows the

What are the two reasons for investment appraisal?

• accurate estimation of timeframe for efficiency

• interest rate comparisons

• bring in new assets for expansion

• replace old assets for efficiency