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)  

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 (a)   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