University of Central Florida (UCF) FIN3403 Business Finance Practice Exam 2

The purpose of investment appraisal is to evaluate the potential profitability and risks of an investment. This process involves analyzing various factors that can affect the financial viability of an investment, including projected cash flows, the time value of money, and associated risks. By conducting this assessment, investors can make informed decisions on whether to pursue a particular investment opportunity, helping to maximize returns while minimizing potential losses.

Investment appraisal techniques, such as Net Present Value (NPV), Internal Rate of Return (IRR), and payback period calculations, are employed to quantify these potential outcomes. This leads to a clearer understanding of whether the benefits of an investment outweigh its costs and associated risks. Effective investment appraisal is crucial for resource allocation and strategic planning within both corporate finance and personal investment contexts.

In contrast, determining investment liquidity focuses more on how quickly an asset can be converted to cash, while calculating taxes owed is unrelated to evaluating an investment's profitability. Assessing market trends and stock prices may provide context for investment decisions but does not directly evaluate an investment's viability or risk.