Lecture 9-Capital Investment Appraisal

Question 1

What is capital used for?

Answer 1

-Used to differentiate between larger scale expenditure made for the longer term, known as capital expenditure/capex’

Question 2

What is revenue expenditure used for?

Answer 2

For smaller scale expenditure which are made for short term

Question 3

Name 3 examples of revenue expenditure

Answer 3

-Rent
-Gas
-Electricity

Question 4

How is revenues expenditure treated?

Answer 4

Treated as an immediate expense of business

Question 5

How is revenue expenditure charged?

Answer 5

Charged immediately to statement of profit and loss

Question 6

Name 3 examples of capital expenditure/capex

Answer 6

-Land
-Buildings
-Machinery

Question 7

How is capital expenditure treated?

Answer 7

Treated as a long term investment which will be capitalised

Question 8

How is capital punishment expenditure /capex charged?

Answer 8

It is charged gradually in a series of depreciation charges over the entire life of the capital asset

Question 9

What happens to the remaining value of a capital expenditure?

Answer 9

This means the remaining cost which has yet to be charged and it’s known as net book value (NBV) and is reported on statement of financial position

Question 10

What are capital assets also known as?

Answer 10

-Non-current assets
-Fixed assets

Question 11

Name 4 methods of investment appraisal

Answer 11

-Payback
-Net present value (NPV)
-Accounting rate of return (ARR)
-Internal rate of return (IRR)

Question 12

What is payback period?

Answer 12

Simply the length of time for cash inflows from project to cover initial cash flows of the investment

Question 13

Name 3 pros of payback period?

Answer 13

-Simple to calculate
-Readily understandable
-Based on cash flow (so objective
-Favours projects which repay quickly