Investment Appraisal Techniques Of Investment

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Table of Contents Investment Appraisal Techniques ………………………………………………………….. 1 Net Present Value ………………………………………………………………….. 1 Payback Period …………………………………………………………………………… 2 Accounting Rate of Return ……………………………………………………….... 2 Internal Rate of Return ………………………………………………………………….. 3 Profitability Index …………………………………………………………………. 3 Investment Decision for European Financial Group ………………………………………. 4 Answer to question b ………………………………………………………………………….. 5 Efficient Market Hypothesis ………………………………………………………………….. 6 Investment Appraisal Techniques Investment has many definitions. In finance, it is ‘the purchase of a financial product or other item of value with an expectation of favorable future returns.’1 In business, investment is ‘the…show more content…
‘4 The formula for NPV is: Payback Period Payback period (PB) is an investment appraisal technique for cash flow analysis that addresses time for investments, acquisitions, or actions to pay for themselves. It also tells how long for incoming returns to cover costs, or for a business/ projects to break even. ‘Like other financial metrics for cash flow analysis such as internal rate of return IRR and return on investment ROI, the payback period metric takes essentially an "Investment view" of an action or investment and its expected cash flow stream. Each of these metrics compares expected costs to expected returns in one way or another. Payback period for an action or investment is the time required for cumulative returns to equal cumulative costs.’5 In decision making, the shorter the payback period the better the business is. It is for the reasons that shorter payback period is viewed as less risky and funds could be available again for further use in business. Accounting Rate of Return Accounting Rate of Return is ‘method of appraising a project involves estimating the accounting rate of return that a project should yield.’6 ARR is related to annual accounting profit and cost of investment. It is used to assess the investment profitability and to compare projects. The higher ARR is better. ARR does not consider the period of profits and the size of investments. It disregard the cash flow and economic
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