investment appraisal

Investment Appraisal

Payback Period: The length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.

( Amount required in the current year Amount earned in the year ) * 12 ( Last -ve value / next +ve value ) * 100

Average / Accounting Rate of Return: The amount of profit, or return, that an individual can expect based on an investment made. Accounting rate of return divides the average profit by the initial investment in order to get the ratio or return that can be expected. This allows an investor or business owner to easily compare the profit potential for projects, products and investments.

1. Add up all the +ve cash flows2. Subtract investment3. Divide by no. of years4. ( Answer / investment ) *100

Net Present Value:The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

1. Starting from Year 1, * all cash flows with discount factor2. Add all values obtained3. Subtract from initial investment