Chapter 6 - Making Investment Decisions
- Created by: Nelly Wightman
- Created on: 19-10-15 14:54
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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
- Payback
- 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
- Payback
- 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
- Payback
- Strengths
- 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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