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INVESTMENT APPRAISEL (quantitative investment appraisal (initial capital…
INVESTMENT APPRAISEL
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Net Present Value
Calculates sum of all future expected net cash flows
Used to find out the value of future profits today (as money received in the future is worth less than if received today due to inflation)
Process: 1.Calculate annual net cash flows of the project
2.Select appropriate rate of interest or required rate of return
3.Obtain the discount factor
4.Multiply net cash flow by discount factors
5.Add present net values for each of the net cash flows
6.Compare total net present value with initial outlay
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payback method
-Time it takes for an investment to repay the initial outlay
-Calculation is based on cash flows
-Short term, works with the nearest month
-Calculate month of payback = (Income required / Contribution per month)
-Contribution per month = (Cash flow for next year / 12)
advantages
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Firms can identify how long they can recoup and whether or not it will break-even on a purchased asset
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Short term, so calculations are less prone to forecasting errors
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