Everand Logo

Welcome to Everand!

  • Discover millions of ebooks, audiobooks, and so much more with a free trial

    Only $11.99/month after trial. Cancel anytime.

    Investment Appraisal: A Simple Introduction
    Investment Appraisal: A Simple Introduction
    Investment Appraisal: A Simple Introduction
    Ebook82 pages1 hour

    Investment Appraisal: A Simple Introduction

    By K.H. Erickson

    4/5

    ()

    Read preview

    About this ebook

    Investment Appraisal: A Simple Introduction offers an accessible guide to the methods and uses of investment appraisal, with examples and calculations throughout.

    Understand the accounting rate of return (ARR), the payback period (PP), the net present value (NPV), and the internal rate of return (IRR). Work through four extended example studies for each approach, and learn how to easily find the NPV or IRR with Excel.

    Compare the strengths and weaknesses of each of the four appraisal methods, and examine potential errors, risk management, and project management.

    LanguageEnglish
    PublisherK.H. Erickson
    Release dateNov 11, 2013
    ISBN9781310568343
    Investment Appraisal: A Simple Introduction

    Read more from K.H. Erickson

    Related to Investment Appraisal

    Related ebooks

    Finance & Money Management For You

    View More
    View More

    Related podcast episodes

    Related articles

    • Article

      A Business Wealth Creation Roadmap

      Aug 1, 2022

      A Business Wealth Creation Roadmap
      5 min read

    • Article

      How To Use Ratios For Different Sectors On The Bourse

      Jan 10, 2020

      when investing there are several ratios you can use as part of analysing a company’s current performance or to compare it with another company. These ratios would include return on equity (RoE), price-to-earnings (P/E), debt-to-equity (D/E), cash con

      2 min read

    • Article

      The Hidden Cost Of SBC

      Sep 23, 2022

      Many tech companies issue stock to employees to give them a stake in the performance of the company. This has been highly effective in a tech bull market and a key incentive to employees. But stock-based compensation (SBC) presents three problems for

      2 min read

    • Article

      How Should YOU Measure Your Investment Performance?

      Aug 22, 2018

      I've spent over 25 years in the financial advisory profession but recently had a startling realization about investment performance. During a friendly debate with a friend who manages a small-cap mutual fund, I realized even seasoned investment profe

      2 min read

    • Article

      Financial Literacy For Architects

      May 7, 2021

      Financial Literacy For Architects
      4 min read

    • Article

      This Is The End Of The Financial Year

      Jun 6, 2018

      This Is The End Of The Financial Year
      4 min read

    • Article

      Choosing The Best Fit

      Aug 7, 2020

      all investments have an impact – either positive or negative. A positive impact can be generated deliberately or unintentionally. Selecting the right metrics is an important tenet of the impact measurement and management process. But simply measuring

      2 min read

    • Article

      Investment Costs – Small Today, But…

      Oct 18, 2019

      investors are often cautioned that high fees and costs can be detrimental to investment performance. Every investment comes at a cost, but are higher investment management costs really an indicator of better management skill and performance? Many fin

      3 min read

    • Article

      How to Spot (and Squash) Nasty Fees That Hide in Your Investments

      Jan 8, 2021

      It’s a new year, and now is the time to compile and look at all your year-end investment statements. You’re likely pretty happy to see some double-digit gains thanks to the stock market (especially tech stocks) hitting record highs. The statements th

      5 min read

    • Article

      Should Your 401(k) Be ‘Custom Made’?

      Oct 11, 2021

      The term “custom made” has long been associated with the finest products.  But custom-made products aren’t limited to cars, clothes and furniture. In fact, 7% of 401(k) plan participants on Vanguard’s platform have their 401(k) asset allocation custo

      5 min read

    • Article

      Recognizing 'Value Patterns'

      May 1, 2018

      Recognizing 'Value Patterns'
      7 min read

    • Article

      5 Terms To Help You Understand Your Investment

      Jan 13, 2023

      Send suggestions for topics and requests for info to yourmoney@you.co.za. We may answer your questions in this column but won’t reply personally. FUND fact sheets contain a lot of information showing the costs, growth and goals of your investment. It

      3 min read

    • Article

      Lower Your Future Income Risk by Taking Action Now

      Apr 13, 2020

      The news about the stock market has been wonderful for a lot of your retirement savings. The portion of your portfolio invested in the stock market has recovered from the thrashing the pandemic delivered and, if it followed the broad market, it has r

      4 min read

    • Article

      Take The Money Or Reinvest?

      Mar 31, 2022

      Take The Money Or Reinvest?
      7 min read

    • Article

      What You Need to Know About Mutual Fund Returns

      May 26, 2022

      Past performance may be little guarantee of future results, but when we assess investments, especially mutual funds, past performance is an informative measure. But it's not the only one. The trick is to understand what you're looking at when you scr

      4 min read

    • Article

      Investing for Retirement Income Is Different – Rethink 60/40 Rule

      Sep 12, 2022

      A lot of retirement guidance I have read lately continues to treat baby boomers the same as the rest of the investor public. Even after the first six months of 2022, when the traditional 60/40 stock/bond portfolio sank more than 20%. I may not disput

      3 min read

    • Article

      Better Rewards, Fewer Risks

      Mar 19, 2018

      Better Rewards, Fewer Risks
      4 min read

    • Article

      Active vs Passive Investing ... Which Path to Take?

      Jun 22, 2018

      Passively managed mutual funds have been all the rage in recent years. They've taken market share from their active counterparts across the board, with $662 billion in inflows worldwide in 2017, according to Morningstar's 2017 Global Assets Flow Repo

      3 min read

    • Article

      Preparing Your Practice For Eofy

      Jun 27, 2021

      Preparing Your Practice For Eofy
      5 min read

    • Article

      I Wish I Knew What EV/Ebitda Was, But I’m Too Embarrassed To Ask

      Feb 16, 2024

      The simplest way to measure the value of a company is to use its stockmarket capitalisation – the value of all its outstanding shares. However, this may not always provide a useful reflection of all the claims that different groups of investors have

      1 min read

    • Article

      Know When Financial Marketing Crosses The Line

      Feb 18, 2023

      The Advertising Regulatory Board recently introduced a section in its Code of Advertising Practice on the marketing of crypto assets. Strangely, the code does not have much to say on the marketing of regular financial products, but the section on cry

      4 min read

    • Article

      Know When Financial Marketing Crosses The Line

      Feb 18, 2023

      The Advertising Regulatory Board recently introduced a section in its Code of Advertising Practice on the marketing of crypto assets. Strangely, the code does not have much to say on the marketing of regular financial products, but the section on cry

      4 min read

    • Article

      Know When Financial Marketing Crosses The Line

      Feb 18, 2023

      The Advertising Regulatory Board recently introduced a section in its Code of Advertising Practice on the marketing of crypto assets. Strangely, the code does not have much to say on the marketing of regular financial products, but the section on cry

      4 min read

    • Article

      Know When Financial Marketing Crosses The Line

      Feb 18, 2023

      The Advertising Regulatory Board recently introduced a section in its Code of Advertising Practice on the marketing of crypto assets. Strangely, the code does not have much to say on the marketing of regular financial products, but the section on cry

      4 min read

    Related categories

    Reviews for Investment Appraisal

    4/5

    6 ratings1 review

    What did you think?

    Tap to rate

    Review must be at least 10 words

    • 4/5
      It is very simple to understand, logically presented to accommodate all relevant investment appraisal methods, both in theory and apparent practice. It is a very good material for understanding the basics of investment appraisal theory and practice, well exemplified.

      1 person found this helpful

    Book preview

    Investment Appraisal - K.H. Erickson

    Investment Appraisal: A Simple Introduction

    By K.H. Erickson

    Copyright © 2013 K.H. Erickson

    All rights reserved.

    No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the author.

    Also by K.H. Erickson

    Simple Introductions

    Choice Theory

    Financial Economics

    Game Theory

    Game Theory for Business

    Investment Appraisal

    Microeconomics

    Table of Contents

    1 Introduction

    2 Accounting Rate of Return (ARR)

    2.1 ARR and ROCE Explained

    2.2 ARR Extended Examples

    2.3 Problems with ARR

    3 Payback Period (PP)

    3.1 Payback Period Explained

    3.2 Payback Period Extended Examples

    3.3 Problems with Payback Period

    4 Net Present Value (NPV)

    4.1 NPV Explained

    4.2 NPV Using Discount Tables and Excel

    4.3 NPV Extended Examples

    5 Internal Rate of Return (IRR)

    5.1 IRR Explained

    5.2 IRR Extended Examples, IRR in Excel

    5.3 Problems with IRR

    6 Investment Appraisal in Practice

    6.1 Potential Sources of Error

    6.2 Risk Management

    6.3 Project Management

    1 Introduction

    In order to survive and grow businesses must make decisions involving investments in new buildings, vehicles, machinery, equipment, shares, or other long-term assets. The central feature of these decisions is time, and an investment involves incurring financial costs at one point in time to gain greater benefits at another, usually later, point in time. This outlay also typically comes as one large investment, while the benefits will usually arrive in smaller amounts over an extended period.

    Making the correct investment decisions is crucial to a business for two main reasons. First, the investments will often involve significant amounts of resources, and a business may make an expenditure representing a large proportion of their total wealth and assets. If the decision is made poorly then it could have damaging or even devastating effects on the future of the business. Second, it may be impossible or very expensive to abandon an investment project once it has begun. An investment made by a business will typically be tailored to its own unique needs, and this specialization is likely to limit the value it holds to other possible users who will naturally have different needs, and in turn reduce the money that could be recouped from the investment.

    Investment decisions are of vital importance to the viability of a business, and as a result it’s essential that all investment proposals are properly screened before they proceed. A crucial part of this screening process is the use of appropriate methods of evaluation and appraisal. In practice there are four basic methods used by businesses worldwide to evaluate investment opportunities, noting that ARR and ROCE follow the same approach:

    1) Accounting rate of return (ARR) / return on capital employed (ROCE);

    2) Payback period (PP);

    3) Net present value (NPV);

    4) Internal rate of return (IRR).

    Some businesses may use a variation of these four methods, and others may not use any investment appraisal method at all, ignoring facts and figures to instead make decisions based on emotions and what feels right. But in practice most businesses around the world appear to use one of the four methods listed above.

    The next four chapters explain and assess each of the appraisal methods in turn, using a range of numerical examples to show how the method is calculated, and investigate the strengths and weaknesses associated with each measure while making comparisons between them. Simple steps to calculate the NPV and IRR of projects using Excel are also given, to facilitate quicker and easier investment appraisal. The final chapter looks at how project appraisal is conducted in practice, and the additional issues that a business may need to manage.

    2 Accounting Rate of Return (ARR)

    2.1 ARR and ROCE Explained

    The accounting rate of return (ARR) takes the average annual accounting profit that an investment is expected to generate, before expressing it as a percentage of the average investment made in the project to earn that profit, measured in accounting terms:

    ARR = (Average annual profit / Average investment) x 100%

    For example, it may already be known that the average annual profit for a project is £20,000 and its average investment is £80,000.

    ARR = (£20,000 / £80,000) x 100%

    = 0.25 x 100%

    = 25%

    Alternatively, the information may not be so easily presented, and some additional calculations may have to be made. Perhaps a business invests £50,000 at the start of an investment project, and another £40,000 after one year, making a total of two investments. In return it expects to achieve an income stream of £110,000 each year over the next five years, starting from the time of the initial investment.

    Average annual investment profit = £110,000 / 5

    = £22,000

    Average investment = (£50,000 + £40,000) / 2

    = £90,000 / 2

    = £45,000

    ARR = (£22,000 / £45,000) x 100%

    = 0.4889 x 100%

    = 48.89%

    These calculations are quite simple, and the formula and examples here give the general idea of what the accounting rate of return is all about.

    ARR

    Enjoying the preview?
    Page 1 of 1