3.6.1

Investment Appraisal

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Investment Appraisal

Investment appraisal refers to the process of appraising or working out, whether an investment is likely to meet the business’ project objectives.

Use of investment appraisals

Use of investment appraisals

  • Investment appraisal allows a business to work out whether an investment is profitable enough, or whether it pays back quickly enough.
  • Investment appraisal also allows a business to compare one project with another project and decide which project is the most suitable for the business’ needs.
Risk of investment

Risk of investment

  • Investments carry risk for businesses as all investments require a financial commitment.
  • Investments involve taking risks in the hope of a possible reward, or profit.
  • Investment appraisal allows businesses to decide whether any potential return is worth the risk associated with an investment.
Information for investment appraisals

Information for investment appraisals

  • Businesses need to gather as much information as possible about any investments they are considering.
  • Investment appraisal includes three techniques which provide a business with different information about any potential investment:
    • Net Present Value.
    • Average Rate of Return.
    • Payback.
Net Present Value

Net Present Value

  • Net Present Value is expressed using a real value in pounds and pence.
  • A negative NPV suggests that a project will not make a business any money whereas a positive NPV suggests that a project will produce a return for the business.
Average Rate of Return

Average Rate of Return

  • Average Rate of Return is expressed as a percentage and is calculated using:
    • (Average net return ÷ investment) × 100
  • The higher the ARR percentage, the higher the project return in comparison to the original investment.
  • The ARR can be used to compare the project with other projects, including investing the money in a bank account and accruing interest.
Payback

Payback

  • Payback is expressed as a period of time. It is the amount of time for cash flow to be equal to the initial cost of a project.
  • The shorter the payback, the quicker the business recovers its original investment.
  • The payback period can be used to compare the project with other projects and businesses with liquidity concerns may choose a project with the quickest payback.
Jump to other topics
1

Business Organisation & Environment

1.1

Introduction to Business Management

1.1.1Why Businesses Exist & Sectors
1.2

Types of Organisation

1.2.1Sole Traders1.2.2Limited Liability1.2.3Non-Profit1.2.4Franchising1.2.5End of Topic Test - Franchising
1.3

Organisational Objectives

1.3.1External Environments1.3.2Business Mission & Corporate Objective1.3.3Mission, Corporate Objectives & Strategy1.3.4SWOT Analysis1.3.5End of Topic Test - SWOT Analysis
1.4

Stakeholders

1.4.1Stakeholders
1.5

External Environment

1.5.1Social & Technological Environment1.5.2Lifestyle & Technological Environment1.5.3Corporate Social Responsibility1.5.4Economic Environment1.5.5Political & Legal Change
1.6

Growth & Evolution

1.6.1Growth & Retrenchment1.6.2Challenges of Growth1.6.3Growth Models1.6.4End of Topic Test - Diseconomies of Scale1.6.5Internationalisation1.6.6Sourcing Resources & Entering Markets1.6.7End of Topic Test - Internationalisation1.6.8Managing Internationalisation1.6.9Impact of Internationalisation
1.7

HL Only: Organisational Planning Tools

1.7.1Organisational Planning Tools
2

Human Resource Management

2.1

Functions & Evolution of Human Resource Management

2.1.1Setting Human Resource Objectives2.1.2Human Resource Management2.1.3Labour Turnover & Retention2.1.4Labour Productivity
2.2

Organisational Structure

2.2.1Organisational Structures
2.3

Leadership & Management

2.3.1Managers2.3.2Management Theories2.3.3End of Topic Test - Management
2.4

Motivation

2.4.1Motivating & Engaging Employees2.4.2Taylor's Theory2.4.3Maslow's Theory2.4.4Herzberg's Theory2.4.5Different Incentives2.4.6Evaluating Incentives
2.5

Organisational (Corporate) Culture

2.5.1Managing Organisational Culture2.5.2Organisational Structures
2.6

HL Only: Industrial/Employee Relations

2.6.1Improving Employer-Employee Relations2.6.2Case Study - The Winter of Discontent
3

Finance & Accounts

3.1

Sources of Finance

3.1.1Internal Sources of Finance3.1.2External Sources of Finance3.1.3Factors for Financing3.1.4End of Topic Test - Debt
3.2

Costs & Revenues

3.2.1Costs & Revenues
3.3

Break-Even Analysis

3.3.1Profit3.3.2Break-Even Analysis
3.4

Profitability & Liquidity Ratio Analysis

3.4.1Profitability Analysis
3.5

Cash Flow

3.5.1Cash Flow3.5.2Solutions to Cash Flow Problems3.5.3Improving Cash Flow & Profits
3.6

HL Only: Investment Appraisal

3.6.1Investment Appraisal
3.7

HL Only: Budgets

3.7.1Cash-Flow & Budgets
4

Marketing

4.1

The Role of Marketing

4.1.1Setting Marketing Objectives4.1.2Market Calculations
4.2

Marketing Planning

4.2.1Marketing Mix4.2.2Segmentation4.2.3Niche & Mass Markets
4.3

Market Research

4.3.1Market Research4.3.2Market Mapping4.3.3Methods of Market Research
4.4

The 4 Ps

4.4.1Product Decisions4.4.2Pricing Decisions & Price Skimming4.4.3Pricing Decisions & Price Penetration4.4.4End of Topic Test - Pricing & Competition4.4.5Promotional Decisions4.4.6Promotional Decisions 24.4.7Promotional Decisions 34.4.8Digital Marketing4.4.9Evaluating Digital Marketing4.4.10Case Study - The Marketing Mix & Promotion4.4.11Place & Distribution
4.5

HL Only: The Extended Marketing Mix

4.5.1The Extended Marketing Mix
4.6

HL Only: International Marketing

4.6.1International Marketing
4.7

E-Commerce

4.7.1E-Commerce
5

Operations Management

5.1

The Role of Operations Management

5.1.1Setting Operational Objectives
5.2

Production Methods

5.2.1Production Processes Overview5.2.2Production Processes5.2.3Production Efficiency5.2.4Technology & Production
5.3

HL Only: Lean Prodution & Quality Management

5.3.1Importance of Quality5.3.2Measuring & Identifying Quality5.3.3Total Quality Management5.3.4Evaluating Total Quality Management5.3.5Case Study - Toyota Production System
5.4

HL Only: Production Planning

5.4.1Capacity5.4.2Productivity & Efficiency5.4.3Technology & Efficiency5.4.4Improving the Supply Chain5.4.5Inventory5.4.6Outsourcing
5.5

HL Only: Research & Development

5.5.1Organisational Planning Tools

Practice questions on Investment Appraisal

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  1. 1
    Project 1 has an initial investment of £15,000,000. What is the net present value of the project if you ignore cash flows earned after Year 3?Multiple choice
  2. 2
    If a business wants to maximise profit, all else being equal, which payback period will be most attractive for a business?Multiple choice
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Improving Cash Flow & Profits

Cash-Flow & Budgets