3.8 Investment Appraisal

Warm Up Your family has been running a corner store for the past 40 years. You want to add a delivery service for the next 5 years. After doing your research, you narrow it down to two options: A.Buy a medium sized van for $50,000 which will create annual cash flows of $12,000 B.Buy a large van for $100,000 which will create annual cash flows of $36,000 Which one would you invest in and why?

Investment Appraisal – Investment appraisal refers to the quantitative techniques used in evaluating the attractiveness of an investment proposal – We will look at two methods of investment appraisal: 1.Payback Period 2.Average Rate of Return

Objective: SWBAT calculate and examine the payback period and the average rate of return as an investment appraisal method by demonstrating mastery using a stations activity.

Payback Period – Estimates the length of time required for an investment project to pay back its initial cost – You calculate it using the following formula: Payback period = initial investment cost _ annual cash flow from investment

Average Rate of Return (ARR) – Measures the annual net return on an investment as a percentage of its capital cost – You calculate it using the following formula: (total returns – capital cost) Average Rate of Return = years of usage x 100 capital cost

Stations Activity – Across the classroom, there are different investment opportunities posted – Choose any 3 problems with your partner/group – Calculate payback period and ARR for each – Work together and compare answers

Exit Ticket – Congratulations! Baltimore City College has finally decided to sell unhealthy snacks in the cafeteria. They are deciding between two vending machines: Machine A initially costs $2,000 and will produce $1,000 in annual cash flows and will be usable over 6 years Machine B initially costs $5,000 and will produce $3,000 in annual cash flows and will be usable over 5 years – Which vending machine is a better investment? Show your calculations and justify your answer.