Capital Investment Decision Making - 35%

Question 1

What is a relevant cash flow?

Answer 1

Future, incremental cash flow

Question 2

What are non relevant costs?

Answer 2

Sunk or past costs
Absorbed fixed overheads
Committed costs
Historical cost depreciation
Notional costs

Question 3

What is an opportunity cost?

Answer 3

The value of the benefit is sacrificed when one course of action is chosen in preference to an alternative

Question 4

What are avoidable costs?

Answer 4

The specific costs of an activity or sector of a business which would be avoided if that activity or sector did not exist

Question 5

What are differential/incremental costs?

Answer 5

The difference in total cost between alternatives. This is calculated to assist decision making.

Question 6

What is incremental revenue?

Answer 6

Difference I revenues between the alternatives

Question 7

What are some quantitative costs?

Answer 7

Purchase price of machine
Installation and training costs

Question 8

What are some quantitative benefits?

Answer 8

Lower direct labour costs
Lower scrap costs and items requiring rework
Lower stock costs

Question 9

What are some qualitative costs?

Answer 9

Increased noise level
Lower morale if existing staff have to be made redundant

Question 10

What are some qualititative benefits?

Answer 10

Reduction in product development time
Improved product quality and service
Increase in manufacturing flexibility

Question 11

What are some internal sources of data?

Answer 11

Sales ledger system
Purchase ledger system
Payroll system
Fixed asset system
Production
Sales and marketing

Question 12

What are some external sources of data?

Answer 12

Suppliers
Newspapers, journals
Government
Customers
Employees
Banks
Business enquiry agents
Internet

Question 13

What are the benefits of collecting, analysing, and presenting high-quality data?

Answer 13

Collaborative working
Customer insight
Risk management
Governance

Question 14

What are the costs of collecting data?

Answer 14

Software licence costs
Software maintenance costs
IT training costs
User training costs
Integration costs
Redundant infrastructure costs

Question 15

What are the two forms of IT controls?

Answer 15

General controls
Application or program controls

Question 16

What are general IT controls?

Answer 16

Ensure the organisation has overall control over its information systems.

Personal controls
Access controls
Computer equipment controls
Business continuity planning

Question 17

What are application or program controls?

Answer 17

Performed automatically by the system and include:
Completioness checks to ensure data is processed
Validity checks
Identification and authorisation checks
Problem management facilities

Question 18

What does the term BI often used to describe?

Answer 18

Technical architecture of systems that extract, assemble, store and access data to provide reports and analysis

Question 19

What is at the base of the BI stack?

Answer 19

Source data systems from where date is extracted, translated, and loaded by extract, transform, and load system into a data warehouse.

Question 20

What is data analytics?

Answer 20

Process of collecting, organising, and analysing large sets of data to generate trends and other information to aid decision making

Question 21

What is Data mining?

Answer 21

Process of sorting through data to identify patterns and relationships within a data set

Question 22

What are the benefits of BI?

Answer 22

Sales people are better informed
Greater transparency
Negotiators can be better informed
Advertising and promotional spend can be better focused
Some data may have value outside the business

Question 23

What is the creation phase of the capital investment process?

Answer 23

Identify objectives
Search for investment opportunities
Identify states of nature

Question 24

What is the decision phase of the capital investment process?

Answer 24

List possible outcomes
Measure payoffs
Select investment projects

Question 25

What is the implementation phase of the capital investment process?

Answer 25

Obtain authorisation and implement projects Review capital investment decisions

Question 26

What are the functions of a capital expenditure committee?

Answer 26

Coordinate capital expenditure policy Appraise and authorise capital expenditure on specific projects Review actual expenditure on capital projects against budget

Question 27

In a capital investment appraisal what do we initially assume?

Answer 27

All cash inflows and outflows are known with certainty Sufficient funds are available to undertake all profitable investments Zero inflation Zero taxation

Question 28

What is time value of money?

Answer 28

Money received today is worth more than the same sum received in the future

Question 29

What are the four widely used investment appraisal methods?

Answer 29

Net present value Internal rate of return Payback period Accounting rate of return

Question 30

What is the NPV?

Answer 30

Net benefit or loss of benefit in present value terms from an investment opportunity

Question 31

What is the IRR?

Answer 31

Rate of return at which the project has a NPV if zero

Question 32

When does capital rationing occur?

Answer 32

When insuffiencient funds are available to undertake all beneficial projects

Question 33

How do we calculate the profitability index in capital rationing?

Answer 33

NPV of project/inital cash outflows

Question 34

How do we calculate the discounted payback profitability index?

Answer 34

Present value of net cash inflows/initial cash outlay

Question 35

What are the different classifications of real options in investment appraisal?

Answer 35

Option to delay/defer Option to switch/redeploy Option to expand/contract Option to abandon

Question 36

How do you calculate the payback period?

Answer 36

Initial investment/annual cash inflow

Question 37

How do we calculate the ARR?

Answer 37

Average annual profit/average value of investment

Question 38

How do you calculate the average value of investment?

Answer 38

Intitial investment plus residual value/2

Question 39

What are the advantages of payback?

Answer 39

Simplicity Useful under improving investment conditions Pray back favours projects with a quick return Uses cash flows not profits

Question 40

What are the disadvantages of payback?

Answer 40

Project returns may be ignored Cash flow timing ignored Lack of objectivity Project profitability is ignored

Question 41

What are the advantages of ARR?

Answer 41

Simple to understand Widely used and accepted Considers the whole like of the project Link with other accounting measures

Question 42

What are the disadvantages of ARR?

Answer 42

Ignores time value of money Not a measure of absolute profitability Does not consider cash flows Vary with specific accounting policies, and the extent to which project costs are capitalised. No definite investment signal Does not provide a reliable basis for project evaluation

Question 43

How do you calculate the real rate of return?

Answer 43

1 + money cost of capital/1 + rate of inflation

Question 44

How do u calculate the equivalent annual cost?

Answer 44

PV of costs/annuity factor for year n

Question 45

What is the method of solution when deciding to replace assets?

Answer 45

Consider each possible replacement cycle Calculate PV of costs for each cycle Divide this PV by annuity factor to find equivalent annual cost Select replacement cycle with the lowest equivalent annual cost

Question 46

What does the replacement analysis model ignore?

Answer 46

Changing technology Inflation Change in production plans

Question 47

What does the price elasticity of demand measure?

Answer 47

The change in demand as a result of a change in its price

Question 48

How do u calculate price elasticity?

Answer 48

Change in quantity demanded/change in price

Question 49

What does it mean if demand is elastic?

Answer 49

Very responsive to change in price. Revenue increases when price is reduced Revenue decreases when price increase

Question 50

What does it mean if demand is inelastic?

Answer 50

Not very responsive to changes in price. Revenue decreases when price is reduced Revenue increases when price increases

Question 51

What factors affect price elasticity?

Answer 51

Scope of the market Information within the market Availability of substitutes Complementary products Disposable income Necessities Habit

Question 52

What are the limitations of the profit maximisation model?

Answer 52

Unlikely org will be able to determine the demand function for their function Orgs aim to achieve a target profit Determining an accurate and reliable figure for marginal or variable cost poses difficulties for the management accountant Unit marginal costs are likely to vary depending on quantity sold

Question 53

What are some pricing strategies based on cost?

Answer 53

Target cost plus pricing Marginal cost plus pricing Premium pricing Market skimming Penetration pricing Price differentiation Loss leader pricing Discount pricing Controlled pricing Product bundling