Payback Period -Finance

More info about Net Present Value

-Money received in the future is worth less than if it were received today -the longer the time period under consideration, the lower the present value of that future amount of money

Net Present Value

-sum of all discounted cash flows -the cost of a particular project

What are the three main methods of investment appraisal

1. Payback period 2. Average rate of return 3. Net present value

Average rate of return equation

Average rate of return = ((Total profit during project lifespan / number of years of project) / initial amount invested) x 100

Net Present Value equation

Net Present Value = Sum of present values - cost of investment

Payback period equation

Payback period = Initial investment cost / contribution per month

Payback period

Refers to the amount of time needed for an investment project to earn enough profit to repay the initial cost of the investment

Investment

Refers to the purchase of an asset with the potential to yield future financial benefits.

Average rate of return

calculates the average profit on an investment project as a percentage of the amount invested -enables managers to compare the return on other investment projects

Investment appraisal

refers to the quantitative techniques used to calculate the financial costs and benefits of an investment decision

Discounting

the reverse of calculating compound interest