Accounting · Study Guide
Key Points
Net Present Value (NPV) is the most theoretically sound method: invest if NPV is positive
Payback period shows how long it takes to recover the initial investment but ignores cash flows after payback
Accounting Rate of Return (ARR) uses profit figures but ignores the timing of cash flows
Exam Focus
Calculate all three appraisal methods, compare mutually exclusive projects, and justify recommendations considering time value and project risk.
Must-Know Terms
Cross-Theme Connections
Absorption and activity based costing
Accurate costing of projects is essential input to investment appraisal
Budgeting
Investment decisions flow from budgeting and long-term planning
Standard costing and variance analysis
Post-investment performance monitoring uses standard costs and variances