F105 Economics Investment Appraisal

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The Temporal dimension

establish which project is the more profitable

DCF is a cash flow that has been discounted to allow for the passing of time and can be used for any business venture (the relationship between time and money form the basis of DCF)

Crude method of measuring the financial success of a project would be total outflow v inflow of cash however this ignores the timing of payments and receipts.

money should always be considered as being capable of continual growth

DCF applies to inflow of money which will become worth less in the future and outflows which will cost less in the future

DCF indicates the importance of the timings of these flows to the anticiapted profits of a project

finding the present value is regarded as discounting

ESTABLISHING THE RATE OF DISCOUNT (what rate?)

if money is to be borrowed, then it would be prudent to use that rate of interest set. this would establish whether a project will make any money.

if this fiqure is wrong he could make a profit or loss without really knowing it.

if it is own money the rate would be equal to what return could be expected on an alternative investment

Judgement would be required over what percentage is worth taking the risk

**All circumstances need to be considered**

Preparation of a table will give the investor a true comparison of what he expects to receive an payout --creating and maintaining the investment.

DCF takes into account

payment and receipts unevenly spread out over the investment period

that money is worth less in the future

tax payable/grants/allowances can be factored in.

Time Blind Appraisal

(Crude rates of return)

NAR =Net Annual Revenue- can be assumed net of tax and accrue-

early NAR can be reinvested or used to pay back borrowing

COMPARATIVE COSTS of initial capital- determing factor where…

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