Capital Investment Decisions Flashcards
What are the possible motivations for investment?
How long generally do the investments last?
Expansion and/or diversification
Innovation (e.g. new technology)
Minimising the costs of production
Sustainability developments
Investing in the downturn
Generally lasts longer than one year
How can new technology affect a business’ workflow?
Substitute - human labour replaced with robots, driverless cars, drones
Augment - CAD software for example creates better images than the human eye
Generate task - human not replace however can include things such as “facial recognition”
Transfer - responsibility shifted to consumers e.g. self service tills
Outline the possible evaluation stages that will take place when considering an investment opportunity.
- Prepare an outline (business case)
- Conduct early screening of opportunities to assess
alignment with strategic objectives - Evaluate the opportunity – net present value analysis
- Conduct sensitivity/scenario analysis
- Present to board and evaluate funding availability (e.g. debt/equity or government funding)
- Review and monitor
How do you calculate the net present value of an investment ?
- Estimate expected future cash flows
- Determine the cost of capital
- Compute NPV and conduct sensitivity/scenario analysis
What expected incremental cash flows are included and excluded?
INCLUDE
- Taxes
- All incremental effects – the impact on the rest of the
business (positive and negative)
- Cash flows that come after sales (e.g. repairs and
maintenance)
- Change in working capital (Stock + Debtors – Creditors)
- Salvage value of any assets
EXCLUDE
- Sunk costs
- Allocated overheads
- Depreciation – unless permitted for tax purposes
- Debt interest – we need to value the investment
opportunity independently of the way that it is financed.
We value a project as if it is all equity financed. The
financing strategy is evaluated separatel
In the UK and US, the over-riding objective of a financial manager in a listed firm is to make decisions that?
Create long-term wealth for shareholders
What best describes the capital investment decision?
The decision to give up cash now for the prospect of greater cash in the future
What creates a cash flow (in/out) for a company?
The changes in working capital balance from one period to the next
What can capital allowances do for a companies tax paid?
Can reduce
What can we say about the working capital over the life of a projects life?
The sum over the life of a project is always zero.
What is the expectations theory of exchange rates
the expected future spot rate is equal to the forward rate (available today)
If we are estimating expected future cash flows in a foreign currency what is the correct method of evaluation?
Estimate the expected future cash flows in the foreign currency, discount them at the foreign cost of capital and then translate at the spot rate of exchange to get to the NPV in the home currency.
According to Black Scoles what are the 5 factors affecting call option prices?
- share price
- exercise price
- risk free rate of return
- volatility of the underlying asset
- time to maturity
When the volatility of return on the underlying asset falls, what is the effect on the call option price, other things being equal?
It will fall
What outcomes must a financial manager in public sector organisations consider?
- Value for money
- Service quality
- Environmental sustainability
- Resilience
- Place (e.g. levelling up as an objective to direct funding away from London/South East)
- Fairness (e.g. societal benefits
