Capital investment appraisal

simple interest
equal amounts every year (month)
= proportion of the original investment
principal
 
S = P + nrP
S: the sum invested after n periods
P: the orginal sum invested
r: the interest rate
n: the number of periods (year/month)
compound interest
interest earned will earn interest in later periods
S = P (1+r)^n
P: the original sum invested
r: the interest rate
n: the number of periods (year/month)
S: the sum invested after n periods
effective interest rates
annual rate of interest
made annual interest from daily, weekly, monthly, quarterly interest
interest is compounded daily, weekly, monthly...
[(1+r)^(12/n) - 1]
n: months
[(1+r)^(365/y) - 1]
y: days
nominal interest rates
per annum figures
interest is compounded over (less) than one year
Principles of discounted cash flow
1.1.1 present value
= discount factor
= 1/(1+r)^n
money invested to earn future sum
discounting formula
P = S*1/(1+r)^n
P: present value
S sum to be received after n time periods
r: rate to return, expressed as a proportion
n number of time periods
 
= r: cost of capital
Annuities, perpetuities
= annuity factors
cumulative present value factors
= [1 - (1+r)^(1/n)]/r
Replies (1)
constant sum of money
for a given number of years
Present value of an annuity = Annuity * annuity factor
Present value of an perpetuity = annuity / interest rate
cash flows net
difference between the payments leaving an organisation's bank account and the receipts paying into the bank account.
Capital investment appraisal
net present value method
present values - investment
= timing
= note: first payment falls
= now
= first year
= ...
positive
acceptable
negative
unacceptable
 
internal rate of return method
rate of interest
= internal rate of return
NPV = 0
approximate IRR
graphical method
sketch graph of NPV against discount rate
interpolation method
IRR = a% + [NPV(A)/(NPV(A) - NPV(B))*(b-a)]%
a: one interest rate
b: other interest rate
NPV(A): NPV at rate a
NPV(B): NPV at rate b
payback method
payback period
time required
cash inflows = cash outflows
= capital investment project
 
Example
= Note
= profit before depreciation
cash flow
= profit after depreciation
profit after deprecation + depreciation = cash flow
 
apprise
shortest payback period
payback period limit
discounted payback
time
cumulative NPV turn from negative to positive

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