Opportunities To Add Value

Question 1

What is the purpose of a business model?

Answer 1

Purpose is to create VALUE

Question 2

What is the four step approach to create Value?

Answer 2

-DEFINE value
-CREATE value
-DELIVER value
-CAPTURE value

Question 3

What is purpose of Capital Investment Techniques?

Answer 3

To assist management to take decisions that are congruent with interests of investors in the business

Question 4

What is payback and its pros/cons

Answer 4

Its no of years needed to return intial investment.

+Easy for management to understand
+Considers uncertainty

-ignores profitability by ignoring cash flows post payback
-ignores time value of money (belief money in future isnt worth more)
-Maximum payback period is arbitrary

Question 5

What is Accounting Rate of Return (ARR)?

Answer 5

Its rate of profit to assets invested.

+ Easy to understand
+Looks at profits over whole asset life

-Ignores time value of money
-profits and assets can be manipulated

Question 6

What is net present value (npv)?

Answer 6

Npv measures surplus/deficit of present value of returns over lifetime of a project after deduction of opportunity costs.

+shows profit/loss to investor
+incorporates time value of money

-complex for managers to understand
-no clear relation to annual profit
-assumes cash flows are reinvested at same rate of return
-no indication of value of risk

Question 7

What is internal rate of return (IRR)

Answer 7

The discount rate on the project that makes NPV = 0

+easy to understand understand
+incorporates time value of money
+shows profit/loss to investor

-assumes cash flows reinvested at IRR
-if cash flow is non standard it creates multiple IRRS

Question 8

What is Weighted Average cost of capital?

Answer 8

The total average cost an entity’s total funds

+Shows management opportunity cost to investors of investing in firm
+Incorporates risks (cost of debt and equity)

-Can be unreliable (if finance is different, is different line of business from usual business)

-Based on ‘pool of funds’ approach so assumes firm can pay for investment from its present stock

Question 9

What are pricing strategies based on?

Answer 9

-Costs
-Competitors
-Customers

Question 10

What is Full cost Pricing?

Answer 10

Fully absorbed cost of manufacturing plus a mark up %

+Simple
+Ensures all costs are recovered

-no guarantee client pays price
-doesnt consider external market factors (e.g non production costs)