Internal Rate of Return (IRR) shows the actual percentage rate of return from the investment considering discounting.
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Discounted Payback Period shows the time needed to earn enough profits to repay the original cost of the investment considering discounting.
Net Present Value (NPV) shows the numerical cash value return from the investment project with taking discounting into consideration.
Discounting is the process of bringing to the present value the future Net Cash flows that will occur during the lifetime of the project.
Compounding is the process of accumulating interest in an investment over time to earn more interest. Interest remains in the bank.
Average Rate of Return (ARR) gives the annual Net Cash Flows (or net profits) from a project as a percentage of the initial cost of the investment.
Payback Period (PBP) gives the length of time required for Net Cash Flows (or net profits) to pay back the initial capital cost of the investment.
Appraising investments is a part of the Capital Budgeting Cycle. Investment Appraisal helps to determine the best investment for a business.
No professional business manager can afford to ignore other qualitative factors of Investment Appraisal in addition to quantitative factors.
Investment Appraisal assesses attractiveness of different capital projects. Projects usually involve a high expenditure and cannot be reversed.
Investment is needed to earn profit for the business! Business organizations, both in the private sector and the public sector, make investment decisions.