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Investment Appraisal - Coggle Diagram

- - - - Add up all positive cash fows = $9 million
      - Subtract cost of investment = $9 million – $5 million
      - = $4 million (this is total proft)
      - Divide by lifespan = $4 million/4 = $1 million (this is annual proft)
      - Calculate the annual proft as a percentage of the initial cost; this is the ARR = $1 million/$5 million × 100 = 20%
  - - - Advantages of ARR
      - ARR provides a percentage return which can be compared with a target return
      - ARR looks at the whole profitability of the project
      - Focuses on profitability – a key issue for shareholders
  - - - Does not take into account cash flows – only profits (they may not be the same thing)
      - Takes no account of the time value of money
      - Treats profits arising late in the project in the same way as those which might arise early
- - - - Simple and easy to calculate + easy to understand the results
      - Focuses on cash flows – good for use by businesses where cash is a scarce resource
      - Emphasises speed of return; may be appropriate for businesses subject to significant market change
      - Straightforward to compare competing projects
  - - - Ignores cash flows which arise after the payback has been reached – i.e. does not look at the overall project return
      - Takes no account of the "time value of money"
      - May encourage short-term thinking
      - Ignores qualitative aspects of a decision
      - Does not actually create a decision for the investment