3.2 Investment Appraisal

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3.2 Investment Appraisal
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Accounting vs. Finance

• Accounting

• Finance

• Record keeping
• Produce reports
• Tax reporting
• Historical
• Operations
• Forecasting

• Decision making
• Apply accounting reports
• Separate financial tools
• Investments and Projects

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Investment

• Purchase an asset
• Capital project
• Yield financial benefits

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Investment Appraisal

• Financial costs and benefits of an investment
• Payback Period
• Accounting Rate of Return
• Discounted Cash Flows
• Net Present Value

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Payback Period

• Similar to break-even
• How long it will take for an investment to repay
  its original cost
• Contribution is revenue less costs related to
  producing the product and occurs before fixed
  costs or overhead are taken out.

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Payback Period

• Advantages

• Disadvantages

• Quick
• Simple
• Aid with cash flow problems
• Break even before asset is replaced?
• Compare projects
• Identifies quick returns
• Less prone to error

• Short-termism
• Contribution not constant
• Focus on time rather than profit

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Accounting Rate of Return

• Calculates average profit of an investment
• aka Average Rate of Return
• Expressed as a
• Compare to interest rate or to other investments
  to see if project is worth the investment

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Qualitative Investment Appraisal

• Quantitativecan be demonstrated numerically
• Qualitativeall non-numerical factors

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Qualitative Factors

• P.O.R.S.C.H.E
• Predictions
• Objectives
• Risk Profile
• State of the Economy
• Corporate Image
• Human Relations
• Exogenous Shocks

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Business Strategy

• Consider risk factors
• Dont forget the time value of money
• Importance of reliable data
• Look beyond the numbers