Week 10 - ACCY 111 RJD Lecture 7

Investment appraisal methods are an important part of

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Investment appraisal methods are an important part of the planning and decision-making process Cash flow estimates need to be prepared in a competent manner such that the implications of following through on the estimates are clear Capital investment appraisal needs to be fully integrated in the broader strategic planning and decision making system Strategic planning should be conduit through which investments must pass so that all aspects can be considered e.g. human, behavioural, environmental etc
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Investment decisions - summary Accounting Rate of Return (ARR) is the average accounting profit from the project expressed as a percentage of the average investment. Payback Period (PP) is the length of time that it takes for the cash outflow for the initial investment to be repaid out of resulting cash inflows. Net present value (NPV) is the sum of the discounted net cash flows from the investment. Internal rate of Return (IRR) is the discount rate that, when applied to the cash flows of a project, causes it to have an NPV of zero.
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Investment decisions - summary For NPV, IRR and PP methods it is cash flows rather than profit flows that are relevant to the assessment of investment proposals. When using discounted cash flow techniques (NPP and IRR) interest payments should not be taken into account in deriving the cash flows for the period. The discount factor already takes account of financing costs. Including interest charges in deriving cash flows would therefore amount to double counting.
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Next Time The planning and budgeting process Chapter 9
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