IB BM 3.8 Investment Appraisal

The quantitative decision-making tool used to assess and justify capital expenditure

• Average Rate of Return (ARR)

• Investment appraisal

• Net Present Value (NPV)

• Payback Period (PBP)

Which method determines the time for a business to recover the initial cost of an investment?

• Average Rate of Return (ARR)

• Investment appraisal

• Net Present Value (NPV)

• Payback Period (PBP)

The Average Rate of Return (ARR) is measured in

• Currency ($, €, ¥)

• Days / Years

• Percent (%)

• Ratio (1:1)

The formula for the Payback Period is =

A good Payback Period (PBP) for an investment is

• the longer the better

• the shorter the better

• it depends on the company

 $\$   $\frac{\frac{Total\ net\ cash\ flow\ -\ Capital\ Cost}{\operatorname{proj}ect\ life\ }}{Capital\ Cost\ \left(Initial\ Investment\right)}\ \ x\ 100$   

is the formula for

• Average Annual Profit of Investment

• Average Rate of Return (ARR) 

• Net Present Value (NPV)
  

• Payback Period (PBP)

Which are advantages of Average Rate of Return (ARR)

• It is simple to understand and calculate

• It focuses on profitability vs timing of cash flow

• Can be used to evaluate the performance of investments

• Easy to compare different investment projects

• Is based on predictions

The _______ the value of the Average Rate of Return (ARR), the more financially attractive an investment project tends to be.

The Net Present Value (NPV) should be

• positive

• negative

• Doesn't matter I'm SL

If the business has limited cash flow which would be the best project?

• Project A

• Project B

• Project C

• Project D