investment appraisal

• what are the investment appraisal calculations

  ARR, NPV and payback period
• what does it mean if a business has a high ARR?

  the higher the ARR the more favourable the project will appear
• advantages of using ARR

  easy to calculate and understand

  takes into account all of the project's cash flows
• disadvantages of using ARR

  ignores the timing of the cashflows

  ignores the time value of money
• what is the time value of money

  risk and opportunity cost both increase the longer you have to wait for your money which means that it's worth less
• advantages of using payback

  easy to calculate and understand

  good for high tech projects or any project that might not provide long term returns
• disadvantages of using payback

  ignores cash flow after payback

  ignores the time value of money
• why are discount factors always less than 1?

  because the value of money in the future is always less than its value now
• discount factors and interest rate

  high interest rates = future payments have to be discounted a lot to give the correct present values

  low interest rates = the future cash inflow doesn't need to be discounted so much as there are less opportunity costs
• opportunity costs

  money or benefits lost by not selecting a particular option during the decision making process
• what does it mean if there's a negative net present value

  the expected rate of return that will be earned on it is less than the discount rate
• what does it mean when there's a high net present value

  means that the investment will exceed the costs of the initial investment and cost of capital
• what factors impact on investment decisions

  business objective and strategy

  corporate image

  industrial relations - loss of jobs as a result of an investment
• sensitivity analysis

  a way to predict the outcome of a decision given a certain range of variables

  input variables and output results