List and describe the four main investment appraisal methods. Which one is the best method to evaluate a risky investment and why? (Chapter 10)
Atrill, P. & McLaney, E. (2008). Accounting and Finance for Non-Specialists.
6th ed. Harlow, England: FT Prentice Hall
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Different types of appraisal methods include payback period, discounted cash flow approach or NPV approach, accounting rate of return and IRR or internal rate of return method. Let us explain this one by one.
Payback period is a simple appraisal methods which takes into account net cash flows per year expected from the project to calculate the total time required to recover investments in the project. The shorter the payback period, the more attractive the investment opportunity is. However, this methodology does not make a distinction between money received today versus money received in the future or time value of money.
Similarly, accounting rate of return method calculate average net return per year by looking at the expected net cash ...
List and describe the four main investment appraisal methods. Which one is the best method to evaluate a risky investment and why?