Investment Appraisal Quiz

Investment Appraisal Projects

• Projects are investments that involve spending financial resources to create capital assets that produce benefits over an extended period of time.
• Project appraisal is the process of assessing a project's viability, including checking basic data, assumptions, methodology, work plan, cost estimates, proposed financing, organizational and management aspects, and overall viability.
• Investment is an increase in physical capital assets that will generate a flow of goods or services in the future, and investment appraisal is mainly concerned with the financial and economic viability of projects.
• Businesses invest in capital expenditure to add extra production capacity, replace worn-out equipment, support new products and processes, implement improved IT systems, and comply with changing legislation and regulations.
• The rate of return is a key consideration with capital investment, as the owners of the business look to management to maximize their return.
• Investment appraisal is used in both public and private sectors, with private sector investment decisions primarily concerned with profitability.
• Payback period is the time it takes for a project to repay its initial investment, and it focuses on cash flows up to the point at which the original investment has been recouped.
• Advantages of payback include being simple to calculate, focusing on cash flows, emphasizing speed of return, and being straightforward to compare competing projects.
• Disadvantages of payback include ignoring cash flows that arise after payback, not considering the time value of money, encouraging short-term thinking, ignoring qualitative aspects, and not creating a decision for the investment.
• The average rate of return (ARR) method of investment appraisal looks at the total accounting return for a project to see if it meets the target return.
• Advantages of ARR include providing a percentage return that can be compared with a target return, looking at the whole profitability of the project, and focusing on profitability.
• Disadvantages of ARR include not taking into account cash flows, not considering the time value of money, treating late profits the same as early profits, and not being the same as actual profits.
• Investment appraisal criteria can be divided into non-discounting techniques (urgency, payback period, accounting rate of return, and debt service coverage ratio) and discounting criteria techniques (net present value, benefit cost ratio, internal rate of return, and annual capital charge).