Management Accounting
Investment Appraisal
Investment appraisal questions require you to evaluate capital investment decisions using payback period, ARR, NPV, and IRR. A demanding topic that rewards methodical working and clear written evaluation.
Always show full workings for NPV calculations including discount factors. For evaluation questions, discuss both quantitative and qualitative factors — don’t rely on numbers alone. State your recommendation clearly.
Key Concepts to Revise
Payback Period
Time taken to recover the initial investment from net cash inflows. Simple but ignores time value of money.
ARR
Average Rate of Return — compares average annual profit to average investment as a percentage.
Net Present Value
Discounts future cash flows to present value using a cost of capital. Positive NPV = invest.
IRR
The discount rate at which NPV = 0. Compare to the required rate of return to decide.
Discount Factors
Always use the table provided. Multiply each year’s cash flow by the relevant discount factor.
Qualitative Factors
Risk, staff impact, environmental concerns, strategic fit — essential for full evaluation marks.