3.7.8 Analysing strategic options: investment appraisal

• The Payback Period calculates how long it takes to recover the initial investment.
• The Payback Period is useful for managing liquidity.
• The Net Present Value (NPV) method relies on accurate forecasting.
• Order the investment appraisal methods from simplest to most complex in terms of calculation:

  1️⃣ Payback Period

  2️⃣ Return on Investment

  3️⃣ Net Present Value
• Net Present Value (NPV) evaluates the full life of a project.


  True
• Match the investment appraisal technique with its key metric:

  ROI ↔️ ROI percentage

  Payback Period ↔️ Years to payback

  NPV ↔️ Net present value
• The payback period calculates how long it takes to recover the initial investment
• NPV relies on accurate forecasting of future cash flows.


  True
• In the NPV formula, `n` represents the number of time periods
• If the Net Present Value (NPV) is negative, the investment should be rejected.


  True
• IRR considers the time value of money.


  True
• Match the investment appraisal method with its description:

  ROI ↔️ Measures the percentage return on investment

  Payback Period ↔️ Calculates time to recover initial investment

  NPV ↔️ Determines current value of future cash flows
• One con of ROI is that it ignores the time value of money
• Investment appraisal is the process businesses use to evaluate the profitability and financial viability of investment projects
• Return on Investment (ROI) measures the absolute profit generated by an investment.

  False
• Match the investment appraisal method with its key metric:

  Return on Investment ↔️ Percentage return

  Payback Period ↔️ Years to recover investment

  Net Present Value ↔️ Current value of future cash flows
• Match the investment appraisal method with its advantage:

  Return on Investment ↔️ Simple to calculate

  Payback Period ↔️ Helps manage liquidity

  Net Present Value ↔️ Considers time value of money
• Investment appraisal is the process businesses use to evaluate the profitability and financial viability of investment projects.
• The Payback Period measures the number of years to recover the initial investment.
• NPV considers the time value of money and evaluates the full life of the project.


  True
• ROI considers the time value of money.

  False
• NPV considers the time value of money and evaluates the full life of the project
• What is the formula for calculating Net Present Value (NPV)?

  $NPV =$$- Initial\ Investment +$$\sum_{t = 1}^{n} \frac{Cash\ Flow_{t}}{(1 + r)^{t}}$
• If the Net Present Value (NPV) is positive, the investment is considered financially viable
• One advantage of IRR is its intuitive interpretation as a return rate
• Investment appraisal is the process businesses use to evaluate the profitability and financial viability
• What does ROI measure in investment appraisal?

  Percentage return on investment
• What does NPV determine in investment appraisal?

  Current value of future cash flows
• What is the key metric for the payback period method?

  Years to payback
• NPV relies on accurate forecasting of future cash flows.

  True
• NPV evaluates the full life of the project
• ROI does not consider the time value of money
• The payback period helps manage liquidity
• NPV considers the time value of money and evaluates the full life of the project.


  True
• What is the key metric for NPV?

  Net present value
• The discount rate in the NPV formula reflects the time value of money
• The discount rate is used to reduce future cash flows to their present value
• One disadvantage of IRR is that it can be ambiguous for non-conventional cash flows
• If the IRR is higher than the cost of capital, the investment is considered profitable
• The formula for Payback Period is Initial Investment divided by Annual Cash Flow