Fichas
Investment Appraisal
Fichas del conjunto (15)
- 1What is payback?It is the time taken for an investment to generate sufficient returns to pay back its initial costs
- 2How do you calculate Payback?The method involves subtracting the returns gained from the investment from the initial investment cost until there is nothing left to pay.
- 3Advantages of Payback- Easy to calculate and understand
- Good for projects which tend to become obsolete fairly quickly; e.g. tech - 4Disadvantages of Payback- Ignores cash flow after payback; after the payback period a project might have a higher payback each year but this wouldn't be taking into account thus effecting the decision made.
- Ignores the time value of money - 5What is Average Rate of Return; ARRIt is the comparison of the total return/profit of an investment compared to it initial cost to see if the investment produces a good return.
- 6How do you calculate ARR?Average annual profit of the investment/Cost of the investment
X100 - 7What is Net present value?It is the net return of the investment when all revenues and costs have been converted into their current worth.
The total value of the investment bringing it back to relevant time periods. - 8How do you calculate NPV?By dividing the individual years cash inflow by the corresponding years discounting factor.
- 9ARR Advantages- Takes into account the full returns of a project over the life of the investment
- Compares the returns to the initial cost showing the return on investment
- Shows the profitability of the project
- Opportunity cost of investment can clearly be seen - 10ARR Disadvantages- Calculate the average annual profits therefore projects may be chosen even though the return takes a longer time. which might be problematic
- Attaches no importance to the timing of the inflows of cash
- Project may not be profitable for many years
- Doesn't take into consideration inflation. - 11NPV Advantages- This method takes into account the impact of inflation on the value of money over a period of time
- Makes the opportunity cost of different projects very clear
- Considers the returns and costs over the whole life of the project
- Considers the timing of inflows by giving smaller discounts for inflow in earlier years. - 12NPV Disadvantages- Deciding on an appropriate discounting factor id complex
- Predicting the likely future which makes the inflation level hard to anticipate. - 13What are some other factors in investment decisions- The level of risk involved in the investment
- Actions of Rivals
- Quality of data and forecasts made
- The objectives of a business
- the current financial position of the firm and availability of finance needed
- The level of interest on any borrowing
- The impact on the corporate image - 14What is sensitivity analysis?It is the management technique that uses variations in forecast data to investigate a range of possible outcomes.
- 15What does sensitivity analysis allow a business to do?Allows a manager to alter variables in the data used in techniques such as investment appraisal. This will help identify the likelihood that different outcomes will be achieved and the level of risk involved.
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- Descripción
- A-Level A-Level Business Studies Fichas sobre Investment Appraisal, creado por Hollie Ferris el 17/01/2017.
- Creado por
- Hollie Ferris
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