Making Smart Financial Decisions: Introduction to Investment Appraisal

Making Smart Financial Decisions: Introduction to Investment Appraisal

Learning Objective

At the end of the lesson, you will be able to understand the concepts of investment appraisal, including payback, discounting, net present value, and internal rate of return.

This slide sets the learning objective for the lesson. It should be displayed at the beginning to provide clarity to students regarding what they will learn.

What do you already know about investment appraisal and its various methods?

Slide 1: Introduction

Investment appraisal helps businesses make informed decisions about potential investments. It involves various methods to evaluate the feasibility and profitability of investment projects.

Introduce the topic and explain the importance of investment appraisal in making smart financial decisions. This slide should set the context for the lesson.

Slide 2: Payback Period

The payback period is the time it takes for an investment to recover its initial cost. It is a simple method that focuses on the time it takes to break even.

Explain the concept of the payback period and its significance in assessing investment projects. Provide a clear definition and highlight its simplicity.

Slide 3: Payback Period Calculation

To calculate the payback period, divide the initial investment by the annual cash inflow. Add up the cash inflows until the total exceeds the initial investment.

Demonstrate the formula and steps for calculating the payback period. Use a simple example to illustrate the calculation process.

Slide 4: Limitations of Payback Period

The payback period ignores the time value of money and doesn't consider cash inflows beyond the payback period. It also fails to account for profitability and risks.

Discuss the limitations of the payback period method. Explain why it is necessary to consider other factors when evaluating investment projects.

Slide 5: Discounting

Discounting is a method that accounts for the time value of money. It adjusts future cash flows by discounting them to their present value.

Introduce the concept of discounting and its significance in investment appraisal. Emphasize the importance of considering the time value of money.

Slide 6: Net Present Value (NPV)

Net Present Value (NPV) measures the profitability of an investment by calculating the present value of cash inflows and deducting the initial investment.

Explain the concept of Net Present Value (NPV) and its role in evaluating investment projects. Highlight its focus on profitability.

Slide 7: NPV Calculation

To calculate NPV, discount future cash inflows to their present value using an appropriate discount rate. Then subtract the initial investment from the total present value.

Demonstrate the formula and steps for calculating NPV. Provide an example to illustrate the calculation process.

Slide 8: Interpreting NPV

If NPV is positive, the investment is considered profitable as it generates more cash inflows than the initial investment. A negative NPV indicates a loss.

Explain how to interpret NPV values. Discuss the implications of positive and negative NPV and how it affects investment decisions.

Slide 9: Internal Rate of Return (IRR)

Internal Rate of Return (IRR) is the discount rate at which an investment's NPV becomes zero. It represents the project's potential return.

Introduce the concept of Internal Rate of Return (IRR) and its importance in investment appraisal. Explain its relationship with NPV.

Slide 10: IRR Calculation

IRR is calculated by finding the discount rate that makes the NPV of the investment equal to zero. This is usually done through trial and error or by using software.

Explain the IRR calculation process and mention the methods used to find the discount rate. Discuss the challenges and alternatives to manual calculations.

Slide 11: Interpreting IRR

If the IRR is higher than the required rate of return, the investment is considered attractive. If it's lower, the project may be rejected.

Discuss the interpretation of IRR values and how they influence investment decisions. Highlight the importance of comparing IRR with the required rate of return.

Slide 12: Comparison of NPV and IRR

While both NPV and IRR help evaluate investment projects, they can sometimes provide conflicting results. NPV focuses on monetary value, whereas IRR emphasizes the rate of return.

Compare and contrast NPV and IRR, highlighting their respective strengths and limitations. Explain the situations where one method may be more appropriate than the other.

Slide 13: Factors Influencing Investment Appraisal

Several factors can influence investment appraisal, including project risks, cash flow predictability, cost of capital, and strategic objectives.

Discuss the external and internal factors that can influence investment appraisal decisions. Encourage students to consider these factors when evaluating investment projects.

Slide 14: Case Study

Present a real-life case study where students can apply the investment appraisal methods learned. Analyze the case study together as a class.

Prepare a case study that requires students to apply the investment appraisal methods taught in the lesson. Encourage class participation and facilitate discussions.

Slide 15: Exercise 1

Provide a set of investment projects with relevant information. Instruct students to calculate the payback period for each project and determine their feasibility.

Design an exercise that allows students to practice calculating payback periods. Provide clear instructions and ensure students understand the expectations.

Slide 16: Exercise 2

Present a series of cash flows for an investment project. Instruct students to calculate the NPV using a given discount rate and interpret the results.

Create an exercise that requires students to calculate NPV and interpret the results. Provide clear instructions and encourage students to discuss their findings.

Slide 17: Exercise 3

Provide a set of investment projects with cash inflows and outflows. Instruct students to calculate the IRR for each project and make investment recommendations.

Design an exercise that allows students to practice calculating IRR and making investment recommendations based on the results. Provide clear instructions and encourage critical thinking.

Slide 18: Summary

Summarize the key concepts covered in the lesson: payback period, discounting, net present value, and internal rate of return. Emphasize the importance of investment appraisal in decision-making.

Recap the main points of the lesson to reinforce students' understanding. Highlight the significance of investment appraisal in making informed decisions.

Slide 19: Q&A Session

Allocate time for a Q&A session where students can ask questions and seek clarification on any concepts covered in the lesson.

Encourage student participation by allowing them to ask questions and seek clarification. Be prepared to provide additional explanations if necessary.

Slide 20: Conclusion

Conclude the lesson by summarizing the key takeaways and reinforcing the importance of investment appraisal in making smart financial decisions.

End the lesson on a positive note by summarizing the main points and highlighting the practical relevance of investment appraisal. Encourage students to apply their knowledge in real-life situations.

Write down 3 things you learned in this lesson.

Have students enter three things they learned in this lesson. With this they can indicate their own learning efficiency of this lesson.

Write down 2 things you want to know more about.

Here, students enter two things they would like to know more about. This not only increases involvement, but also gives them more ownership.

Ask 1 question about something you haven't quite understood yet.

The students indicate here (in question form) with which part of the material they still have difficulty. For the teacher, this not only provides insight into the extent to which the students understand/master the material, but also a good starting point for the next lesson.