kashifafridi

Just a recap:

Future value
1 )The value at a future date
2)Calculating through compounding
3)Calculated for an amount invested today
4)Calculated at simple or compound interest
5)Compound interest: FV = PV (1 + r)n


There are 4 techniques on investment appraisal for F9. Investment appraisal technique can be classified as Discounted Cash Flow technique & Non-discounted Cash Flow technique.

Discounted Cash Flow Technique :
1) Net Present Value (NPV)
2) Internal Rate of Return (IRR)


Non-discounted Cash Flow Technique
1) Return on Capital Employed (ROCE), also known as Accounting Rate of Return (ARR), & Return on Investment (ROI).
2) Payback Period

Notes :

1) Only ROCE take account of depreciation. The rest technique should not include depreciation. That mean ROCE should use "Expenses after deduct depreciation". But the rest techniques use "Expense before deduct depreciation".

2) Discounted Cash Flow Technique is take account "TIME VALUE OF MONEY". That mean there has inflation adjustment & cost of capital.


3) Investment appraisal concerned about long term investment. for example, acquisition of plant & machinery, acquisition of land & building, undertake 5 year contract & etc.


4) It is important to know these techniques advantage & disadvantage. Because it is highly examinable. Different technique suitable for different company. For example, A small company may prefer to use Payback Period technique due to it is simple & not costly, But a large company may prefer to use NPV technique because it is a large amount investment & Shareholder will pay attention on whether there is positive NPV on a proposal.

5) The examiner may request candidate to analysis a proposal by using these 4 techniques & compare these technique which 1 are more prefer.

6) NPV is the preferred method. Because it allows the comparison be made between projects with different size and length of time.


Hope it helps to everyone on this forum...

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