Investment Appraisal (Cash Flows)

Question 1

What is the definition of Cash Flows?

Answer 1

• Financial assessment of capital investment.
• The business must utilise data regarding the expected cash flows associated with investment.

Question 2

What is Discounted Cash Flow?

Answer 2

A method of investment appraisal considers the time value of money.
I.E the realisation that the value of money changes over time.

Question 3

What is Net Present Value?

Answer 3

The value of future money if you had it now.
Considering inflation and potential for earning interest on investment capital.
In other words, money in the future is worth less then the same amount today.

Question 4

Advantages of Net Present Value/Discounted Cash Flow?

Answer 4

• Allows for future earning to be adjusted to present values
• Easy to compare different projects
• Risk can be estimated on future cash flows.

Question 5

Disadvantage of Net Present Value/Discounted Cash Flow?

Answer 5

• Complex to calculate
• Difficult to set discount factors that far into the future.
• Interest rate estimations may be inaccurate.