Edexcel Business A Level Revision

Investment Appraisal - The use of numerical techniques to predict the financial outcomes of potential capital investments. Net present value - The difference between the present value of the future cash flows and the amount invested in the project. FORMULA  - NET PRESENT VALUE EACH NET CASH FLOW MULTIPLIED BY THE DISCOUNT FACTOR WHICH WILL GIVE YOU THE NPV ADD UP ALL THE NPV'S POSITIVE = ACCEPT PROJECT NEGATIVE = REJECT PROJECT   Interpreting NPV allows for close attention to the value of the return in today's terms so is a more realistic view of any investment. Different interest rates can be applied to reflect the expectations of different investors. After applying the discount factors, the NPV could be positive, which may suggest it is a worthwhile investment, or negative, in which case the investment should be rejected. Advantages Disadvantages Considers all future cash flows The most complicated method compared with Payback...

Investment Appraisal -  The use of numerical techniques to predict the financial outcomes of potential capital investments. Average Rate of Return (ARR) -   looks at the  total accounting return for a project  to see if it meets the target return Business investment projects need to earn a satisfactory rate of return if they are to justify their allocation of scarce capital. FORMULA  - AVERAGE RATE OF RETURN (TOTAL NET CASH FLOW / NUMBER OF YEARS) / INITIAL INVESTMENT X 100 = ARR% Interpretation of ARR revolves around comparison with other projects and should take into account the level of risk and the period of time over which the return is forecast to take place. If the investment was funded by outside investments they would compare the ARR with potential returns on other investments as well as the potential risks. For example the least risky investment may be to place the money in a bank deposit account, but the ARR on such an investment might only...