Chapter 6 - Making Investment Decisions

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  • Chapter 6 - Making Investment Decisions
    • The process of deciding whether or not to undertake capital investment
    • Investment Appraisal
      • Scientific approach investigating expected consequences
      • If capital investment is worthwhile
      • Numerical techniques
      • Qualitative factors
    • Investment Decisions
      • Payback
        • This refers to the time taken for an investment to repay the initial outlay from the net returns provided by that investment
        • Shorter the better
        • = income still needed for payback / net return for the next year *52
      • Average Rate of Return (ARR)
        • Total net returns divided by the expected lifetime of investement
        • Percentage of initial investment
        • Good = Higher percentage of loans cost
        • (Total Net Return / Surpluss No.years) / Initial Cost * 100
      • Net Present Value (NPV)
        • Calculates to monetary value now of the projects future cash flow
        • Better cash now than later
        • Uses discount factors
        • Calculating NPV
          • 1. Multiply each net return by the relevant discount factor
          • 2. Add up all annual NPV's to calculate the total return
    • Strengths and Weaknesses
      • Strengths
        • Payback
          • Easy to calculate
          • Emphasises speed of return
          • Easy to compare
        • ARR
          • Percentage return = compare with target return
          • Looks at whole profitability
        • NPV
          • Time value of money
          • Decision making mechanism
          • Looks at all cash flows involved
      • Weaknesses
        • Payback
          • Ignores cash flows
          • No 'time value' of money
          • No decision making help
        • ARR
          • Ignores cash flows
          • No 'time value for money'
          • Harder to calculate
        • NPV
          • More complicated
          • Difficult to select discount rate
          • Relies on rate seleted
    • Risk and Uncertainties
      • Help inform decision making by reducing risk
      • Key things to consider
        • Gearing
        • Stability
        • Opportunity Cost
        • Time Frame
        • Competitors Actions
        • Untitled
    • Qualitative Factors
      • Aims of firm
      • Environment
      • Economy
      • Data reliability
      • Untitled

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