3.8 Investment Appraisal

• Payment period=capital cost/contribution per month
• Average rate of return= (Profit/years of use) / capital cost x 100
• The three approaches to quantitative investment appraisal are payback period, average rate of return and net present value.
• Payback period= capital cost / contribution per month
• Payback period can be calculated by using the cumulative net cash flow.
• Average rate of return = ((total returns - capital cost) / years of use) / capital cost x 100
• Net present value = sum of present values (value x rate) - original cost
• Exogenous shocks are external influences or events of unquantifiable risk that may need to be considered when making investment decisions.