Investment Appraisal
Date: @Nov 21, 2020
Recall Notes
Definition
the process of assessing whether it is worthwhile to invest funds into a partic
Financial techniques of
accounting rate of return (ARR) - profitability
appraisal
payback period - cash flows
net present value (NPV) - cash flows
internal rate of return (IRR) - cash
the NPV and IRR take time value of money into account
they are all based on the additional benefits and costs which will arise fro
these are referred to as the incremental profits and cash flows
existing project and cash flows are ignored as being irrelevant as they wi
undertaken or not
More definitions Sunk costs: consists of expenditure that has been incurred before a new pro
the cost is already incurred and is not incremental
its cost is an historical fact and cannot have any bearing on future decisio
Opportunity costs: the values of benefits that will be sacrificed if resources a
other applications
the lost revenue arising from the alternate medium is the opportunity co
Accounting rate of return
definition: the average profit from an investment expressed as a percentage
ARR = average profit / average investm
average profit is the average of the profit arising directly from the investm
of the project
average investment = the costs of assets aquired / 2 ∗ 100
Advantages:
1. the expected profitability of a project can be compared with the present p
2. ARR is comparatively easy to calculate
Disadvantages:
1. average annual profit used to calculate ARR is unlikely to be the profit ea
2. profit is a subjective concept
it depends upon the number of variable policies such as provisions fo
valuation of inventory, and other matters
3. the method does not take into account the timing of cash flows
Date: @Nov 21, 2020
Recall Notes
Definition
the process of assessing whether it is worthwhile to invest funds into a partic
Financial techniques of
accounting rate of return (ARR) - profitability
appraisal
payback period - cash flows
net present value (NPV) - cash flows
internal rate of return (IRR) - cash
the NPV and IRR take time value of money into account
they are all based on the additional benefits and costs which will arise fro
these are referred to as the incremental profits and cash flows
existing project and cash flows are ignored as being irrelevant as they wi
undertaken or not
More definitions Sunk costs: consists of expenditure that has been incurred before a new pro
the cost is already incurred and is not incremental
its cost is an historical fact and cannot have any bearing on future decisio
Opportunity costs: the values of benefits that will be sacrificed if resources a
other applications
the lost revenue arising from the alternate medium is the opportunity co
Accounting rate of return
definition: the average profit from an investment expressed as a percentage
ARR = average profit / average investm
average profit is the average of the profit arising directly from the investm
of the project
average investment = the costs of assets aquired / 2 ∗ 100
Advantages:
1. the expected profitability of a project can be compared with the present p
2. ARR is comparatively easy to calculate
Disadvantages:
1. average annual profit used to calculate ARR is unlikely to be the profit ea
2. profit is a subjective concept
it depends upon the number of variable policies such as provisions fo
valuation of inventory, and other matters
3. the method does not take into account the timing of cash flows
