3.7.8

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  • 3.7.8 Investment Apprasial
    • Financial methods
      • Avergae rate of return
        • Formula: ARR = average annual profit x 100% divided by assest's initial cost
        • The percentage allows comparison with other investment opportunities
        • Calculates the annual percentage rate of return on each possible investment
      • Net present value
        • Disocunted cash flow
          • Time-value principle
            • Risk
            • Opportuinty cost
            • To show the effect of the time principle we need to calculate the present value of cash inflows and outflows through the use of discounting
          • Discounting is the process of adjusting the value of money received at some future date to its present value
        • To calculate we need to know:
          • Inital cost
          • Expected inflows and outflows
          • Rate of discount
          • Duration of investment
          • Remaining value of profect after investment
        • Present value is the value of a future stream of income from an investment, converted into its current worth.
      • Payback
        • Payback measures the time period required for the earnings from an investment to recoup its original cost
    • Businesses take decsions regarding investment when...
      • Contemplatig introducing new products
      • Investing in technology
      • Expansion
      • Investing in infrastructure
    • Method chosen depends on...
      • Type of firm
      • Market
      • Corportae objectives

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