Capital Investment Appraisal

Long Term Investment

Management will need to have estimates of the initial investment and future costs and revenues of a project in order to make any long term decisions.

Time value of money

If I have $10 in my pocket now, how much will it be worth in four years time? This is time value of money.

Interest

Interest is the amount of money which an investment earns overtime. Interest is two types:-

   1. Simple               2. Compound               3. Effective interest Rate

Simple Interest Calculation:

  S=P+ nrP

Where P = The original sum invested
           r  =  The interest rate (expressed as a proportion, so 10% = 0.1)
           n  =  The number of periods (normally years)
           S =  The sum invested after n periods, consisting of the original capital (P) plus interest earned (future  
                   value)
 
2. Compound Interest Calculation:
                               n
           S = P(1 + r)


Where P = The original sum invested
           r  =  The interest rate (expressed as a proportion, so 10% = 0.1)
           n  =  The number of periods (normally years)
           S =  The sum invested after n periods, consisting of the original capital (P) plus interest earned (future  
                   value)

 3. Effective interest Rate Calculation:
                         12/n
               [(1 + r)       -1)

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