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