BUSS3 - Finance - Investment Appraisal
Summary of what each investment method shows and the advantages and disadvantages of each method
- Created by: Cristina Vigo
- Created on: 25-05-14 12:38
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- Investment Appraisal
- Payback
- Payback
calculates how long it will take to pay back the cost of an initial investment.
- It shows how many years and month it will take to pay back
- The shorter the pay back the better for the business as they are recieveing ti earlier.
- Advantages
- Guides the business and is easy to use
- Benefits new business' who want to know the time frame in which their investment will be paid back
- Disadvantages
- Doesn't tell us what happens after pay back
- Doesn't deal with time value of money
- Payback
calculates how long it will take to pay back the cost of an initial investment.
- Average Rate Of Return
- Average Rate Of Return Calculates the total return divided by the expected lifetime of the investment. It is shown as a percentage.
- Average Rate Of Return needs to be more than interest paid in order to be worthwhile
- Advantages
- Results can be easy to compare and are easily understood
- Shows profitability of a project
- Disadvantages
- Harder and more time consuming to do
- Doesn't consider time value of money
- Net Present Value -
- Net Present Value calculates the total return on an investment taking into account the time value of money when all current costs have been converted into their current worth.
- It discounts each years return because £1 now wont be the same in 5 years
- A positive NPV means a worthwhile investment
- Advantages
- Only method that considers time value of money therefore more accurate
- More precise answer
- Disadvantages
- Time consuming
- Difficult to understand
- Payback
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