KT 8: 3.3.2 Investment Appraisal

Question 1

Investment appraisal

Answer 1

involves using forecast cash flows to estimate the value of an investment decision based on quantitative criteria, then backing up the calculation with an assessment of non-financial data.

Question 2

Criterion level

Answer 2

a yardstick set by directors to enable managers to judge whether investment ideas are worth pursuing.

Question 3

Cumulative cash

Answer 3

the build up of cash over several time periods.

Question 4

Discounting

Answer 4

apply a discount factor to a money sum to take into account the opportunity cost of money over time.

Question 5

Present values

Answer 5

the discounting of future cash flows to make them comparable with today’s cash. This takes into account the opportunity cost of waiting for the cash to arrive.

Question 6

Short-termism

Answer 6

making decisions on the basis of the immediate future and therefore ignoring the long-term future of the business.

Question 7

Tactical decisions

Answer 7

those that are day-to-day events and therefore do not require a lengthy decision-making process.