Capital expenditure appraisal is the evaluation of investment opportunities.
1. Payback method = The payback method involves calculating the payback period. This is the amount of time it takes a business to recover the initial cost of an investment. Generally, the shorter the payback period, the better. It's important to remember that teh payback method uses net cashflow.
2. The Average Rate of Return (ARR) = ARR measures the average annual profit as a percentages of the annual investment. This means that ARR measures the % of profit generated each year by accepting the investment opportunity. When comparing two or more investment opportunities, the ones with higher ARR would be more desireable becasue it indicates that particular project can genegerate more profits for the compeny. It's important to remember that ARR uses profit in the calculation.
3. The Net Present Value (NPV) = NPV cosiders the costs and benefits of an investment by calculating the value of a sum of money available in the future expressed in terms of what it is worth today using discounted table. Investment projects with higher NPV sre more desireable. It's important to remember NPV uses net cash flow in the calculation.