Accounting rate of return (ARR)

Also referred to as the average rate of return, this method of investment appraisal calculates the average annual profit of an investment project expressed as a percentage of the amount of invested.

Capital expenditure

A business organization’s spending on the purchase or acquisition of fixed assets, e.g. spending on buildings (premises), machinery, equipment and tools.

Discount rate

The figure used to reduce the future value of money. It is used to establish the present value of cash that is yet to be received by the business.

Investment

Capital expenditure with the intention of a financial return on this spending at some point in the future.

Investment appraisal

The formal process of quantifying the financial risks of an investment decision, in order to establish whether the expenditure can be justified from a financial perspective.

Net present value (NPV)

A method of investment appraisal that calculates the real value (rather than the absolute value) of an investment project by discounting (adjusting) the actual value of money received in the future.

Payback period (PBP)

The investment appraisal method that considers the time it takes for the amount of money invested in a project to be repaid using the proceeds generated from the investment.