Making Long Term investment decisions Flashcards
Where would we see long-term investment decisions?
- Projects with long-term implications
- Profit-seeking firms
- Public sector/ Government projects
- Individuals
What are the two types of expenditure?
Capital expenditure and Revenue expenditure
What is capital expenditure?
Spending on long-term items.
Capital (or NCL) spent on NCA, depreciation is applied.
What is revenue expenditure?
Spending on shorter-term items. Money spent on day-to-day expenses. Is reported in the IS.
What is the investment appraisal process?
- Identify possible investment projects
- Carry out initial screening
- Evaluate and approve project
- Monitor and review the project.
What are the considerations involved in the investment appraisal process?
- Strategic alignment with company direction?
- Is the project possible
- Alternative investments?
- Non-financial factors?
What is payback period?
Time for the cash inflows to equal initial cash investment
What are the advantages in the payback period?
- Simple to use and understand
- Focusing on early payback = better liquidity
- Risk is reduced, early cash flows are emphasised.
What are the disadvantages of the payback period?
Cash flows after the payback period are ignored, they may be substantial.
What is discounted cash flow?
Time value of money. It converts a future cash flow to a present value.
What is the Net Present Value (NPV)?
Takes account of the time value of money and uses all cashflows
Generally if the NPV is positive what does it mean for the company?
The company is financially better.
Generally if the NPV of company is zero what does it mean?
It is accepted but no value is created.
Generally if the NPV of a company is negative what does it mean?
The company is financially worse.
What is the internal rate of return?
The return internally generated by the project
