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)