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Assessing the value of an investment
Assessing the value of an investment
What is an investment?
The act of committing money or capital to an endeavour with the goal and expectation of obtaining additional income and profit.
Definition: Investment Appraisal
Investment appraisal is the process of businesses evaluating whether an investment is attractive and profitable.
Or, where alternatives exist, which option is likely to be the best.
Using investment appraisal essentially allows a company to compare 2 or more potential investments
Investment Appraisal Tools:
Investment Appraisal Tools:
Least initial cost (IC)
Total sum of predicted profit
Fastest ROI (payback period/ PBP)
Literally just the fastest return on profit
Most valuable return per year (ARR)
(Total Return - IC) = Total Profit
((TP/Number of years)/Initial Cost) x 100
Most valuable given inflation (NPV)
Present value ≠Value of money when you get a return
Discount rate is given in the exam (assumes discount rate stays the same)
Starts at year 0
Acronym Helper:
PBP = PayBack Period
ARR = Average Rate of Return
NPV = Net Present Value
IC = Initial Cost
IRR = Internal Rate of Return
Source: IB Business Management Syllabus (2016 - 2022)
"Using a different method is bound to get you a different answer" - Mr E. Owen (circa 2018)
"Using a different method is bound to get you a different answer" - Mr E. Owen (circa 2018)
Net Present Value
Net Present Value
Net Present Value is the current monetary value of a product, or cash.
Net Present Value is the current monetary value of a product, or cash.
For example: in Jan 2018, a $100 would be worth $90 by Jan 2019.
For example: in Jan 2018, a $100 would be worth $90 by Jan 2019.
This can be calculated through: Future Value = Present Value * (1 + r)^n
This can be calculated through: Future Value = Present Value * (1 + r)^n
where r = rate of return, n = number of paying periods (annual, bi-annual, quarterly, monthly etc)
where r = rate of return, n = number of paying periods (annual, bi-annual, quarterly, monthly etc)
n = # of Paying Periods:
n = # of Paying Periods:
Annual = 1
Bi Annual = 2
Quarterly = 4
Monthly = 12
Daily = 365
Practice Questions:
Practice Questions:
Practice Question 1:
Practice Question 1:
A CEO of a company wants to find out the future value of the land of one of it's assets after 5 years. Present value is $1,500,000. Due to the nature of land, it tends to appreciate annually by 5%.
A CEO of a company wants to find out the future value of the land of one of it's assets after 5 years. Present value is $1,500,000. Due to the nature of land, it tends to appreciate annually by 5%.
Calculate the Future Value?
Calculate the Future Value?
Practice Question 2:
Practice Question 2:
See the question image to the right -->
See the question image to the right -->
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