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Investment Appraisal

4 dot points across 4 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

How is the accounting rate of return calculated, and what does the internal rate of return add to project appraisal?

Calculate the accounting rate of return and explain the internal rate of return as the break-even discount rate
A focused answer to the H2 Principles of Accounting outcome on ARR and IRR. The accounting rate of return on average investment, its profit basis, the internal rate of return as the rate giving zero NPV, and how to estimate IRR by interpolation.
10 min answer →

How do the appraisal methods compare, and what non-financial factors and limitations shape an investment decision?

Compare the investment appraisal methods and evaluate a decision considering qualitative factors and limitations
A focused answer to the H2 Principles of Accounting outcome on evaluating investment decisions. Comparing payback, ARR, NPV and IRR, the role of estimates and the cost of capital, qualitative factors, and the limits of appraisal.
10 min answer →

How does net present value account for the time value of money, and how is a project's NPV calculated and interpreted?

Calculate the net present value of a project using discount factors and use it to make an investment decision
A focused answer to the H2 Principles of Accounting outcome on net present value. The time value of money, discounting future cash flows with given factors, the NPV decision rule, and why NPV is the most rigorous appraisal method.
11 min answer →

How is the payback period calculated, and what are its strengths and weaknesses as an appraisal method?

Calculate the payback period for a project and evaluate its usefulness as an investment appraisal method
A focused answer to the H2 Principles of Accounting outcome on the payback period. Calculating payback with even and uneven cash flows, interpolating within a year, and the strengths and limitations of the method.
9 min answer →