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Investment appraisal
One of the most important long-term decisions for any business relates to investment. Investment is the purchase or
creation of assets with the objective of making gains in the future. Typically investment involves using financial
resources to purchase a machine/ building or other asset, which will then yield returns to an organisation over a period
of time.
Key considerations in making investment decisions are:
* How much will the investment cost? Are there funds available?
* How long will it be before the investment starts to yield returns?
* How long will it take to pay back the investment?
* What are the expected profits from the investment?
* Could the money that is being ploughed into the investment yield higher returns elsewhere?
A company is considering an investment costing £20m. Its projected returns extend over four years:
Year Cash inflow Cash outflow Cumulative cashflow
0 - 20 - 20
1 6 - - 14
2 8 - -6
3 12 - 6
4 10 - 16
There are several methods for evaluating the returns on an investment project. The Average Rate of Return (ARR)
calculates the average annual return as a percentage of the investment: