investment appraisal
Overview
Investment appraisal involves evaluating potential capital projects to determine their financial viability and attractiveness. Businesses use various techniques to assess whether an investment will generate sufficient returns to justify the initial outlay and associated risks. This lesson explores the primary quantitative methods used in investment appraisal.
Introduction to Investment Appraisal
Investment appraisal is a critical decision-making process for businesses, particularly when considering significant capital expenditures. These decisions often involve large sums of money and have long-term implications for the business's profitability and strategic direction. The primary goal is t...
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Key Concepts
- Investment Appraisal: The process of evaluating the profitability and viability of capital expenditure projects.
- Capital Expenditure: Spending on assets that will be used for more than one year, such as machinery, buildings, or vehicles.
- Payback Period: The time it takes for an investment to generate enough cash flow to recover its initial cost.
- Accounting Rate of Return (ARR): A measure of the average annual profit from an investment as a percentage of the initial investment or average investment.
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Exam Tips
- →Always state the decision rule for each appraisal method (e.g., 'Accept if Payback is less than X years', 'Accept if NPV > 0').
- →When comparing projects, clearly justify your choice, often by weighing the advantages and disadvantages of each method used and considering qualitative factors.
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