Every note that covers this specification point.
Net Present Value (NPV) is a financial method used to assess whether an investment is worthwhile by calculating the total value of future cash flows in today's money, minus the initial cost. A positive NPV means the project is expected to generate profit beyond the required rate of return, while a negative NPV suggests the investment should be rejected. It is one of the most reliable investment appraisal techniques studied at GCSE and A-Level Business.
The Average Rate of Return (ARR) measures the annual percentage profit a business expects to earn on an investment, relative to the initial cost. It helps businesses compare projects and decide where to allocate funds. ARR is popular because it is simple to calculate and easy to understand, but it ignores the timing of cash flows and can oversimplify complex investment decisions.
The payback period measures how long it takes for an investment to repay its initial cost from the cash inflows it generates. It is one of the simplest methods of investment appraisal, favoured by businesses for its ease of calculation and clear focus on liquidity. The main advantages include simplicity and quick risk assessment, while key disadvantages are that it ignores profitability after the payback point and the time value of money.
