Capital Investment Appraisal

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What are the advantages of payback?
Easy to calculate, Easy to understand, Places emphasis on earlier cash flow which are likely to to be more accurate than later cash flows, Ideal for high technology projects.
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What are the drawback of payback?
Cash flows after payback period are ignored, Fails to consider the timing of net cash flows, Inflation and time value of money and life of the asset are ignored, Cash flow estimates may be inaccurate.
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How is payback calculated?
Year with the cumulative net cash flow nearest cost of investment+ (Cumulative net cash flow of nearest year/Net cash flow of next year)
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What is payback?
The period of time it takes for the initial cost of capital investment to be repaid from net cash inflows.
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What is discounted cash flow?
A method that recognises the time value of money. It compares net cash flows at their present values with the initial cost of the capital investment.
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What are the advantages of discounted cash flow?
All cash flows are considered, Time value of money is used, Timeing of cash flows taken into account, Calculations are easy to make when using a table.
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What are the disadvantages of discounted cash flow?
Cost of capital rate is difficult to ascertain or may vary, Meaning of net present value not always clear, When comparing projects the highest is not always best as other factors need to be considered, estimates of cash flow may be inaccurate.
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What other other factors must be considered before making a decision?
Sales, Output-Labour or capital intensive, Staff-redundencies, trainning, pay. Working capital required, Needs- premises, transport, materials. Cost of finance, Tax considerations, Forecasting techniques-What if?. Size of the investment.
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What layout would a report to the managers need to look like?
To (Manager), From(Student), Date(Today), Subject, Introduction, Main report, Conclusion
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Card 2

Front

What are the drawback of payback?

Back

Cash flows after payback period are ignored, Fails to consider the timing of net cash flows, Inflation and time value of money and life of the asset are ignored, Cash flow estimates may be inaccurate.

Card 3

Front

How is payback calculated?

Back

Preview of the front of card 3

Card 4

Front

What is payback?

Back

Preview of the front of card 4

Card 5

Front

What is discounted cash flow?

Back

Preview of the front of card 5
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