Managerial Decisions- D D 2.0 / 5 based on 1 rating ? BusinessAll LevelsAll boards Created by: kim fentonCreated on: 25-05-11 11:03 Investment Appraisal Methods e.g. firm must decide between two efficiency systems Payback Method Accounting Rate of Return (ARR) Net Present Value (NPV) Profitability Index Internal Rate of Return (IRR) 1 of 7 Payback Method Which Project repays Initial Capital Cost quicker? Positives: simple/easily understood quick payback may be essential investors usually demand fast returns Negatives: lack of objectivity cannot estimate future profitability of company post payback cash flows are ignored 2 of 7 Accounting Rate of Return (ARR) Where the Profit Generated is compared to the Cost of Investment = (Average Annual Profit/Average investment) x 100 Positives: simple allows for differences in the projects good to manage managerial performance Negatives: project duration and timing of cash flows are ignored concept of profit is subjective, depending on accounting practice 3 of 7 Net Present Value (NPV) PV = FV/(1+(0.01*r))^n Compares investment options by valuing cash payments and cash reciepts expected to be earnt. 4 of 7 Profitability Index (PV of future cash flow) / (PV of Initial Investment) at PI=1, company breakseven therefore, accept project if PI > 1 Positives: allows comparision of costs/benefits determines how scarce funds can be allocated 5 of 7 Internal Rate of Return (IRR) rate of interest that makes NPV = 0 Positives: measures worth/risk of project allows comparison of projects software/simple graphs allows the IRR to be found allows cash flows to be evaluated at different discount rates Can be found by trial and error using different rates of interest until NPV =0 If IRR > opportunity cost of capital the project is profitable and will yield a positive NPV 6 of 7 Incorporating Risk/Uncertainty in Investment Appra Collect Data/Estimates on probability of different values of cash flow Run a Monte Carlo Simulation of cash flows Use results to estimate the probabilities and values of key statistics including min, max and expected 7 of 7
Temperature Sensors Market Analysis, Key Players, Business Opportunities, Share, Trends, High Demand and Growth Forecast 2023-2026 0.0 / 5
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