Unit 7 - Section 8: Analysing strategic options, investment appraisal

Question 1

Investment

Answer 1

Capital spending in a business

Question 2

Induced investment

Answer 2

Resulting from sales or expansion

Question 3

Autonomous investment

Answer 3

Replacing worn out capital goods

Question 4

Quantitative investment appraisal

Answer 4

Numerical methods of assessing the value of an investment decision

e.g Payback, ARR, NPV

Question 5

Qualitative investment appraisal

Answer 5

Investigating factors which may affect the decision whether or not to invest which may not be numerically measured

Question 6

Payback period

Answer 6

The amount of time it will take for an investment project to recover the initial outlay through cost savings or in red cash flow – additional profits

Question 7

Average rate of return

Answer 7

This method looks at the average profit per year and investment will make net of its cost

Question 8

Net present value

Answer 8

And investment appraisal method that considers the impact of time on the value of money

Question 9

Investment criteria

Answer 9

A firms specific requirements for investments. Investments not meeting these criteria will not go ahead

Question 10

Sensitivity analysis

Answer 10

It can help assess the level of risk involved in a decision by measuring how sensitive outcomes are to changes in the variables involved in the calculations such as costs or sales or volumes

Question 11

Private sector investment – key influences

Answer 11

Confidence: previous success?
External influences: interest rates?, Inflation?, Competitions actions?
Return: what will the phone get back? Could be profit? Cost savings?
Motive: is it induced or autonomous?

Question 12

Benefits of payback

Answer 12

Avoid cash flow problems
Easy to explain and understand
Allows the firm to Bridget to keep up with technology

Question 13

Problems of payback

Answer 13

Cash earned pass the payback has no influence on the decision
It ignores the overall profitability of the project

Question 14

Advantages of average rate of return

Answer 14

The method shows the profitability of the project
Comparison of the profitability with other projects and interest rates is easy so it aids decision-making if this is a key criteria

Question 15

Disadvantages of average rate of return

Answer 15

Accuracy – the method is based on predicted revenues

It fails to account for the fall in value of the money over time