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Lesson aims
Lesson aims
- Calculate and evaluate the payback period as a investment appraisal method
- Calculate and examine the average rate of return as an investment appraisal method
- Calculate and discuss the net present value method as an investment appraisal method (HL)
Investment appraisal - this uses a range of quantitative decision-making techniques to assess investment projects.
The payback period
The payback period
- Tells the business the number of years and months the investment will take to pay for itself.
- Calculates the length of time that it takes for a capital investment to pay for itself, using the annual net cash flows provided by that investment.
The average rate of return (ARR)
The average rate of return (ARR)
- Tells the business the future cash flows expressed as an average return on the money it spent on the investment.
Net present value (NPV) (HL only)
Net present value (NPV) (HL only)
- Tells the business the future value of the investment will be.
- The difference in summation of present values of future cash inflows or returns and the original cost of investment.
- Present value = Net cash flow × Discount factor
Other qualitative techniques
Other qualitative techniques
- The product life cycle – is the product in the growth or maturity phase? If the firm believes that sales are going to grow rapidly in the future, then investment should proceed.
- The Boston Consulting Group (BCG) matrix – products that are deemed to be stars are predicted to have a bright future so will normally be priorities for investment funds.
- STEEPLE analysis – results from external analysis may point to future opportunities. It is important to consider the level of risk when an economy is growing or not.
- Product portfolio analysis – this may point towards a gap in a product portfolio that needs to be filled with investment in a new product.
- Market research results
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