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Investment appraisal - Coggle Diagram
Investment appraisal
Investment appraisal is a technique used to evaluate planned investment by a business, and measure its potential value to the business.
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There is risk with investment as there is no certainty that it will result in increased profits and could even result in a reduction of future revenue.
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Payback Period
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Will select the investment that returns the initial cost of the investment in the shortest time frame.
If the payback period doesn’t fall at the end of a year, use the following method to find out how many months of the year it takes to fully pay the cost of investment:
Find the two years that payback falls between, then:
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Advantages
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Effective to use when technology is changing at a fast rate, such as high-tech projects, in order to recover the cost of investment as quickly as possible
Disadvantages
Ignores total profitability, the focus is just on the speed at which the initial outlay is repaid
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