exam Flashcards
importance of investment decisions
long term future of business and cash is a scarce resource
stages in appraisal abc
a) identify opportunities
b) consider alternatives
c) acquire relevant info
stages in appraisal defg
d) planning
e) take the decision
f) implement decision and control project
g) project review
accounting rate of return
avg profit / initial capital invested
payback period
calculate time required to pay back investment
net present value
present value of cash - initial investments
internal rate of return
discount rate giving a NPV = 0
opportunity cost of capital
expected rate of return by giving up a project
PV
future value after t periods/ (1+r) ^t
DF
1/ (1+r)^t
NPV rule
managers increase shareholders wealth by accepting all project with positive NPV
IRR formula
RA + (NPVa/ NPVa-NPVb) (Rb - Ra)
real cost
(1+nom) / (1+inflation)
capital rationing
occurs when theres not enough funds to invest in all projects
soft capital rationing
internally imposed constraints e.g. cut in managers spending
