investment appraisal Flashcards
(21 cards)
What is investment appraisal
technique used by a business to evaluate planned investment and measure its potential value
What is autonmous and induced investment and new tech
auto-replace work out goods
induced- new investment arising from expansion
new tech- availablitly of new tech
Why do businesses carry out investment appraisal and whats the risk
large amounts invested in hope of profitable returns yet no gurentee if success of increased profits and may result in reduction of revenue
What do businesses do to ensure profitable returns yet is made
carry out research and gather data to help decide on which investment is likely to he most profitable and how long the intial money will take to be made back
What is the payback period
time taken for project to pay back initial outlay
Why is payback period useful
if there a number of different investments the payback period will select the one that pays back intial costs the fastest
Another method of calculating payback period when doesnt fall at end of the year to see how many months of year it takes
month of payback= income needed in period/contribution per month
Give 3 andvantages of pay back period and 3 disadvantages
simple to use and easy to calculate
helps with managing cash flow
effectively to use when tech is changing at fast rate to recover costs of investment as quickly as possible
ignores cash flow over the lifetime of project
ignores total profitability only focussed on speed of recovoring intitial outlay
What is arr method
measures the average net return every year with cost of investment
What is the first method of arr
average profit per annum/intial investment cost
x100
What arr also be used for
compare with keeping money in the bank and compare interest rates
3ads and disads of arr method
includes all projects cash flows
easy to compare with different projects
shows profitability of the option
ignores the timing of cash flow
does not allow for effects of inflation on values of future cash flows
What does the discounted cash flows method take into account
time value for money as money changes in value over time
What does dcf measure
the net present value of an alternative option/project
What is npv
value for future money if you had it now taking into account inflation and potential of earning interest on investment capital or cost of finance on raising investment capital
How to show npv as percentage of inital cost
npv/intial costs x100
how to calculate npv minus the intial costs per year
npv dived number of years
then that divi d by intial investment x 100
What should a business do if npv is negative
not invest in it
Ads and disads of dcf and npv
allows for future earning to be adjusted to present values
easy to compare to different projects
allows for impact of inflation on future cash flows
difficult to calculate
discount factors may be in accurate making npv inaccurate
difficult to set discount values for future especially further into the future
further points that need to considerd for investment appraisal
is investment high tech- if so short payback period may be necessary as tech is fast charging
is short term cf important?
is inflation likely to be stable? will npv figuires be reliable
how much risk is involved
Qualitive factors of investment appraisal
-impact on staff-(training for new tech, reduncies from investment)
-impact on existing products-concentrate on new product
-match stratagies and objectives of business?
-state of economy- boom or recession
-action of competitors-are they investing?
-does ethical considerations come into play
-funding to invest?
-availability of new tech
-confidence of managers-optimistic managers more likely to invest
