Notesale: Turn your study into money

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There are four main methods of investment appraisal, net present value,
internal rate of return, accounting rate of return and payback period
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Investment appraisal seeks to answer any
questions that may arise when making investment decisions so that the
decision maker can conclude which is the best investment
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Payback period is the length of time taken to recover the initial cost of a
project
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If there are uneven cash flows, we must
calculate the cumulative cash inflows to make it clear between which periods
the initial investment has been paid back
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For example, if the
cash flows were as follows, we can see that 100,000 which is the initial
investment, is between 80,000 and 120,000, therefore the payback period
must be between years 3 and 4
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5 Years to
payback the project
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This also means that the results
can easily be compared by any user as we are simply comparing two or more
numbers and choosing the smallest
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Lastly, as it is so quick
and simple, it is possible to calculate this in addition to another investment
appraisal method without the loss of the speed a decision can be made, for
example, payback period compliments the net present value method,
because net present value cannot indicate how long it will take for the initial
investment to be recovered
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It could be argued
that the most significant of these is that it does not fulfil the objective of wealth
maximisation, which is the main purpose of any of the investments to be
undertaken
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It is
also an unclear method if there is no specific target set by the decision
maker
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Lastly, the payback
period method does not consider the time value of money, therefore the actual
payback period is likely to be different than what has been calculated
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If cash is to be invested in a
project, there is an opportunity cost of putting the most into the bank and
gaining interest on it

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