cal factors are used. Intangible effects such as goodwill, references etc. are not considered. It should in other words be recognized that there are other criteria than maximizing profits that a company may adopt, in determining whether to invest: The return on investment (ROI/or accounting rate of return (ARR)) The payback method Discounted cash flow (DCF) methods The net present value (NPV) The internal rate of return (IRR) Earnings before interest, taxes, depreciation and amortization (EBITDA) ACCOUNTING RATE OF RETURN (ARR) Compare the estimated ARR of a proposed investment/project with the target ARR. If the estimate exceeds the target, accept the project. If it is lower, reject the project. Depreciation should be accounted for. Estimated average profit after depreciation*100 ARR = Estimated average investments Appendix 2: Financial Calculations PAYBACK METHOD AND DISCOUNTED CASH FLOW (DCF) Payback is normally defined as the period, usually expressed in years, which it takes the cash inflows from an investment project to equal the cash outflow. Depreciation is not accounted for in this model. The ARR method of investment appraisal ignores the timing of cash flows and the actual cost of capital. Payback considers the time it takes to recover the original investment cost, but ignores total cash flow over a project lifetime. The payback time for a particular investment is illustrated in Figure A2.4. Discounted cash flow (DCF) takes into account both the time value of money and total cash flows over a project lifetime. It is therefore often argued that DCF is a superior method to both ARR and payback. NET PRESENT VALUE Present value (PV) can be defined as the present cash equivalent of a sum of money receivable or payable at the stated future date, discounted at a specified rate of return. Compound interest: P = current investment i = annual interest rate, compounded each year Pn = value of the investment after n years After one year the value of the investment increases to P1 = Po+iP=Po(1+i) After two years, th