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4.1 - Coggle Diagram
4.1
Investment Appraisal Techniques
(Capital Budgeting Techniques)
Non-discounted techniques
Payback Period (Years)
Calculated by cumulative cash inflow till it covers the initial investment
Ignores time value of money
It might ignore large cash inflow after the payback period
Accounting Rate of Return (ARR) %
ARR = Avg. annual operating profit / Avg. investment to earn that profit * 100
The higher the % the more attractive the investment
Pros
Simple to calculate
Monitor Profitability
Cons
Ignores timing of income or profit
Ignores Time vale of money
Ignores the size of investment
Discounted Techniques
Net Present Value (NPV)
Internal Rate of Return (IRR)
Time Value of Money
PV = FV / (1-r)^n
(Calculate how much $1 received in n years is worth now)
Discounting cash to consider the time value of money