1298606
Description
Flashcards by Denise Harper, updated more than 1 year ago
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Created by Denise Harper
almost 10 years ago
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| Question | Answer |
| Why is an Investment decision Important? | Affects Long term future of business Cash is a scarce resource: Wastes retained earnings Endangers future sources of capital Decisions are often Irreversible |
| What are the stages of Investment Appraisal? | 1. Identification of Opportunities 2. Consideration of Alternatives 3. Acquiring relevant information 4. Planning 5. Taking the Investment Decision 6. Implementing the decision and controlling the project. 7. Project review |
| Name the Traditional Appraisal Techniques? | Accounting Rate of Return & Payback |
| What are the Discounted Cash-flow methods? | Net Present Value & Internal Rate of Return |
| How is Accounting Rate of Return calculated? | The ARR is calculated by dividing the average profit per year by the initial (or average) capital invested i.e. A B C D Av prof 500 750 1250 5000 Capital 2000 3000 5000 20000 ARR 25% 25% 25% 25% |
| What are the ARR Advantages? | (1)Easy to calculate (2)Easy to understand (3)Seems logical to base return on initial capital invested. |
| What are ARR Disadvantages? | (1) No single definition of profit or capital (2) Does not allow for further outflows after the initial investment (3) No adjustment for the time value of money |
| How is Payback Calculated? | The Payback method calculates the period of time required to repay the investment |
| What are the Payback Advantages? | (1) Easy to calculate (2) Easy to understand (3) Concentrates on earlier time periods (4) Useful when capital limited |
| What are the Payback disadvantages? | (1) No criteria for acceptance (2) No account of timing of cash-flows within payback period (3) Ignores cash-flows after payback period (4) No account of time value of money |
| What is Present Value? | Value today of a future cash flow. |
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