Investment Appraisal - Finance

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How long it takes for the business to get their investement back

Count the investment over the number of years, to work out the extra number of months

= (amount still owing /  the inflow from next year) x 12


Indicates the length of time the capital is at risk for

Important if the business has cash flow problems


If you want to make direct comparisons similar amount of start up capital must be needed

It ignores the timing of cash flows

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Accounting Rate of Return

It calculates the average return from a project expressed as a percentage of the cost of the project, so it takes into account the profitability of the project

ARR = (Average Annual Profit / Initial Investment) x 100

Step by step:

1. Add up all the inflows = total inflows

2. Total inflows - intital investment = total profit

3. Total profit / no. of years investment = Average Annual Profit

4. (Average Annual Profit / Initial Investment) x 100

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ARR Advantages and Disadvantages


Calculates returns without relying on using an acurate discount rate

Allows  direct comparisons of returns

Important when profitability is an issue


It doesn't account for fluctations in returns

Ignores the timing of cash flows

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Net Present Value

It values future cash flows in terms of todays money

1. Present Value = cash inflow x discount rate

2. Net Presesnt Value = Present value -- Initial Investment


Can validly compare investments with significantly different amounts of start up capital

Takes into account the effects of inflation - external factors


Very difficult to be accurate, especially in the long term

It doesn't compare expected returns with the cost of investment

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