UNIT 3.8 Investment Appraisal SL / HL
Investment appraisal involves evaluating potential investment opportunities to determine their viability and potential returns. Three key methods are employed in this process: payback period, average rate of return, and net present value.
The payback period is a straightforward method that assesses the time it takes for an investment to recover its initial cost. It is a simple measure of liquidity and is particularly useful for businesses seeking a quick return on their investments.
The average rate of return calculates the average annual profitability of an investment over its lifespan. This method provides a percentage figure, offering insights into the overall profitability of the investment relative to its cost.
Net present value (NPV) is a more sophisticated approach, considering the time value of money. NPV calculates the present value of future cash flows generated by an investment, deducting the initial investment cost.
These methods collectively offer businesses a comprehensive toolkit. That said…..they are just the start of the process as qualitative data and information also needs to be used to gain a full picture!
Question 1: Case Study: GreenTech Ltd. is a company that manufactures solar panels.
GreenTech are considering investing in a new solar panel production line that costs $500,000
Calculate the payback period, average rate of return, and net present value for GreenTech Ltd.’s investment in the new solar panel production line.
The cash inflows are thought to be:
Year / Inflow | Discount Factor |
Year 1: $100,000 | 0.91 |
Year 2: $150,000 | 0.83 |
Year 3: $200,000 | 0.75 |
Year 4: $250,000 | 0.68 |
Year 5: $300,000 | 0.62 |
Question 2: Case Study: RoboFactory Inc. is a company that specializes in producing industrial robots.
RoboFactory plan to invest $1,000,000 in a new robot assembly line. The expected annual cash inflows for this investment are as follows:
Calculate the payback period, average rate of return, and net present value for RoboFactory Inc.’s investment in the new robot assembly line.
The cash inflows are thought to be:
Year / Inflow | Discount Factor |
Year 1: $200,000 | 0.89 |
Year 2: $300,000 | 0.79 |
Year 3: $400,000 | 0.71 |
Year 4: $500,000 | 0.63 |
Year 5: $600,000 | 0.56 |
Question 3: Case Study: BioPharma Ltd. is a pharmaceutical company planning to invest $2,000,000 in a new research and development facility.
The expected annual cash inflows for this investment are as follows:
Calculate the payback period, average rate of return, and net present value for BioPharma Ltd.’s investment in the new research and development facility.
Year / inflow | Discount factor |
Year 1: $200,000 | 0.89 |
Year 2: $300,000 | 0.79 |
Year 3: $400,000 | 0.71 |
Year 4: $500,000 | 0.63 |
Year 5: $600,000 | 0.56 |
Question 4: Case Study: E-Drive Motors is an electric vehicle manufacturer looking to invest $3,000,000 in a new battery production facility.
The expected annual cash inflows for this investment are as follows:
Calculate the payback period, average rate of return, and net present value for E-Drive Motors’ investment in the new battery production facility.
Year / inflow | Discount factor |
Year 1: $500,000 | 0.95 |
Year 2: $1,000,000 | 0.90 |
Year 3: $1,500,000 | 0.86 |
Year 4: $2,000,000 | 0.82 |
Year 5: $2,500,000 | 0.78 |
Question 5: Case Study: AeroDynamics Inc. is an aerospace engineering company that designs and manufactures commercial aircraft. They are considering investing $4,000,000 in a new wind tunnel testing facility.
The expected annual cash inflows for this investment are as follows:
Calculate the payback period, average rate of return, and net present value for AeroDynamics Inc.’s investment in the new wind tunnel testing facility.
Year / inflow | Discount factor |
Year 1: $600,000 | 0.93 |
Year 2: $800,000 | 0.87 |
Year 3: $1,000,000 | 0.82 |
Year 4: $1,200,000 | 0.77 |
Year 5: $1,400,000 | 0.73 |
