Investment appraisal

It means purchasing capital goods, such as equipment, vehicles and new buildings, and improving existing fixed assets with the goal of generating income or appreciation.

• Payback Period

• Investment

• Investment appraisal

• Average Rate of Return

It refers to the quantitative techniques used in evaluating the viability, feasibility or attractiveness of an investment proposal.

• Payback Period

• Investment

• Investment appraisal

• Average Rate of Return

Quantitative investment appraisal does not require the following information.

• The initial capital cost of the investment

• The estimated life expectancy

• The residual value of the investment

• The forecasted net returns

• Depreciation

It estimates the length of time required for an investment project to pay back its initial cost outlay.

• Payback period

• Average rate of return

• Investment appraisal

• Investment

• Depreciation

It is not at advantage of payback period.

• It is a short-term measure of quick returns on investment

• Business managers can easily comprehend and use the results obtained

• It does not help firms with cash-flow problems

• It is a useful method in rapidly changing industries such as technology.

• It is simple and fast to calculate.

It is not at disadvantage of payback period.

• It does not consider the cash earned after the payback period which could influence major investment decisions

• It ignores the overall profitability of an investment project by focusing only on how fast it will pay back

• The annual cash flows could be affected by unexpected external changes in demand which could negatively affect the payback period

• It is a short-term measure of quick returns on investment.

It measures the annual net return on an investment as a percentage of its capital cost.

• Investment

• Investment appraisal

• Average rate of return

• Payback period

It is not an adavantage of the average rate of return.

• It shows the profitability of an investment project over a given period of time

• Unlike the payback period, it makes use of all the cash flows in a business

• A business can use its own criterion rate and check this with the ARR for a project, to assess the viability of the venture

• It does not consider the timing of cash inflows. Two projects might have the same ARR but one could pay back more quickly despite this.

It is not a disadavantage of the average rate of return.

• It allows for easy comparisons with other competing projects, for better allocation of investment funds

• Since it considers a longer time period or useful life of the project, there are likely to be forecasting errors. Long-term forecasts decrease the accuracy of results

• The effects on the time value of money are not considered

We assume for the IB examinations, that the cash inflows are the same as the annual revenues earned from the project and the cash outflows are the annual operating costs.

• False

• True