Investment Appraisal
Investment: Expenditure by a business on buying another business or non-current assets with the ai of creating a future stream of revenue
Risk: The chance of a misfortune occurring, possibly resulting in financial loss
Investment appraisal: A series of techniques designed to assist businesses in judging the desirability of investing in particular projects
Investment opportunities can exist in a variety of situations:
When contemplating introducing new products
Expansion
Why businesses may undertake investment
Spending
Investing in new technology
Purchasing other businesses
Risk and investment appraisal
Systematic risk
Specific risk
Payback period
A simple technique that measures the time period required for the earnings from an investment to recoup its original cost
Average rate of return (ARR)
More complex method of investment appraisal
[(Average profit)/(Capital cost of the investment)] x 100
Steps
Income form investment - Capital cost of investment = Total profit from investment
Total profit from investment / Expected lifespan of asset in years = Average annual profit
Average annual profit / Capital cost of investment x 100 = Average rate of return (ARR)