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    Investment Appraisal PDF

    Uploaded by

    Hazwan Jamhuri
    The document discusses several methods for investment appraisal including payback period, average rate of return, and net present value. Payback period calculates how long it takes to repay the initial investment, while average rate of return compares total profit to money invested as a percentage. Net present value discounts future cash flows to account for the time value of money and allows projects to be compared based on their present value. Each method has advantages and disadvantages for evaluating investments and their profitability over time.

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    Download as PDF, TXT or read online from Scribd

    Investment Appraisal PDF

    Uploaded by

    Hazwan Jamhuri
    213 views3 pages
    The document discusses several methods for investment appraisal including payback period, average rate of return, and net present value. Payback period calculates how long it takes to repay the initial investment, while average rate of return compares total profit to money invested as a percentage. Net present value discounts future cash flows to account for the time value of money and allows projects to be compared based on their present value. Each method has advantages and disadvantages for evaluating investments and their profitability over time.

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    Payback period, average rate of return and discounted cash flow.

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    Investment appraisal.pdf

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    The document discusses several methods for investment appraisal including payback period, average rate of return, and net present value. Payback period calculates how long it takes to repay the initial investment, while average rate of return compares total profit to money invested as a percentage. Net present value discounts future cash flows to account for the time value of money and allows projects to be compared based on their present value. Each method has advantages and disadvantages for evaluating investments and their profitability over time.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    213 views3 pages

    Investment Appraisal PDF

    Uploaded by

    Hazwan Jamhuri
    The document discusses several methods for investment appraisal including payback period, average rate of return, and net present value. Payback period calculates how long it takes to repay the initial investment, while average rate of return compares total profit to money invested as a percentage. Net present value discounts future cash flows to account for the time value of money and allows projects to be compared based on their present value. Each method has advantages and disadvantages for evaluating investments and their profitability over time.

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    Investment appraisal

    http://www.thestudentroom.co.uk/wiki/revision:investment_appraisal

    PAYBACK
    Works out how long it takes to repay the initial investment. e.g. Investment A. costs 100. Annual return of 25 Length 5 years YEAR 0 1 2 3 4 5 NET CASH FLOW CUMULATIVE CASH FLOW (ANNUAL RETURN) (CASH IN FLOW) -100 -100 25 -75 25 -50 25 -25 25 0 25 25

    Payback is 4 years.

    Sometimes it is necessary to calculate the month of payback when the figure is reached part way through the year. To do this you would you use formula:

    ADVANTAGES

    Easy to calculate Easy to understand Most relevant to businesses with cashflow problems Emphasises speed of return good in rapidly changing markets

    DISADVANTAGES

    Ignores money received after payback Can be difficult to establish a target payback period Doesnt consider the future value of money Short term approach

    AVERAGE RATE OF RETURN


    Compares profit with money invested.

    To work this out, break it down into stages.

    Calculate lifetime profit = total inflows outflow Divide by the number of years Use the formula

    e.g. Investment A cost 100 25 return for 5 years

    1. Inflow outflow 125 - 100 = 25

    2. Divide by the number of years. 25/5 = 5

    3. Use formula 5 / 100 X 100 = 5% return

    ADVANTAGES

    Percentage provides easy comparisons across projects Shows the profitability of a project

    DISADVANTAGES

    Harder and more time consuming Ignores time value of money

    NET PRESENT VALUE (DISCOUNTED CASH FLOW)


    This takes into account the time value of money. It is based on the principle that money is worth more than it is in the future. The principle exists for two reasons:

    Risk money in the future is uncertain Opportunity cost Money could be in an interest account earning interest.

    Discounting
    This is the process of adjusting the value of money from its present value to its value in the future. The key to discounting is the rate of interest. The business chooses the most appropriate rate for the life of the project. It then identifies the discounting factor. The amount of money is then multiplied by the discounting factors to convert it to its net present value.

    e.g. Project A 100 25 return 5 years

    YEAR NET RETURN DISCOUNT FACTOR NET PRESENT VALUE 0 -100 0 -100 1 25 0.952 23.8 2 25 0.907 22.675 3 25 0.864 21.6 4 25 0.823 20.575 5 25 0.784 19.6 = 108.25

    108.25 MINUS INITIAL COST (100) = 8.25 Profit = 8.25

    ADVANTAGES

    Considers the time value of money Reducing discounting rate reduces future monies more heavily Only one method that gives a definitive answer Positive return it is worth doing

    DISADVANTAGES

    Time consuming More difficult to understand Based on an arbitrary choice of interest rate

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