9706 · 4.4.1
Investment Appraisal flashcards
Revision flashcards for Cambridge 9706 Investment Appraisal (syllabus 4.4.1). Flip, recall, then mark a real past-paper question.
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Payback Period
The time it takes for a project's net cash inflows to recover the initial cost of the investment. It is a measure of liquidity and risk.
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Accounting Rate of Return (ARR)
A measure of profitability calculated as (Average Annual Profit / Average Investment) x 100. It uses profit, not cash flow.
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Net Present Value (NPV)
The difference between the present value of future cash inflows and the initial investment. It accounts for the time value of money.
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Internal Rate of Return (IRR)
The discount rate at which the NPV of a project is zero. It represents the project's true percentage rate of return.
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Time Value of Money
The concept that a sum of money is worth more now than the same sum will be at a future date due to its potential earning capacity.
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Cost of Capital
The required rate of return a company must earn on an investment to satisfy its investors. It is used as the discount rate in NPV calculations and as a benchmark for IRR.
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Discounted Cash Flow (DCF)
A valuation method used to estimate the value of an investment based on its expected future cash flows. NPV and IRR are both DCF techniques.
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NPV Decision Rule
If NPV is positive (> 0), accept the project. If NPV is negative (< 0), reject the project. If NPV is zero, the project earns exactly the required rate of return, and the firm is indifferent.