Capital Investment Appraisal Flashcards Preview

A2 Accounting > Capital Investment Appraisal > Flashcards

Flashcards in Capital Investment Appraisal Deck (8):
1

Capital Investment

The investment of capital in NCA go help businesses generate profits.

2

Capital Investment Methods

Payback
Net Present Value

3

Payback Advantages

Simple to understand and calculate,
Focuses on quick recovery of cash, liquidity and risk minimisation.

4

Payback Disadvantages

Ignores cash flows after payback,
Doesn’t take into account the time value of money.

5

Net Present Value

Sum of all the present values (NCF x DF).

6

NPV Decision Rules

If positive - ACCEPT. Covers more than the cost of capital.
If negative - REJECT. Will not cover the cost of capital to be invested.

7

NPV Advantages

Gives greater weighting (importance) the cash flows in the early years, as they are less risky.

8

Discount Factor Advantages

Accommodates for the risk of long term projects by converting all the future cash flows to a common ‘todays money value year 0 basis’.