All businesses require capital equipment
(non-current assets)
E.g machinery/premises/vehicles
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Why would a business undertake capital investment?
-To replace existing equipment
(improve productivity)
-To expand productivity
(Meet customer demand)
-To reduce the production costs
(Use money elsewhere)
-Assets depreciate in value
(Replace before assets are worth too little)
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Why does capital investment involve an element of uncertainty?
Due to expenditure occurring today in order to produce some benefit in the future
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Investment appraisal techniques are designed to aid?
-Decision making for investment projects
(which option is best)
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What 3 factors does capital investment depend on?
-Firms objectives
(growth/survival/profitability)
-Th opportunities available
('gap in market')
-The constraints it works with
(threats)
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What is the equation for Net cash flow?
Net cash flow=Cash in - Cash out
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How to find cumulative cash flow?
Initial investment - Present net cash flow
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What are 3 problems with cash flow forecasting?
-The validity of the figures
(hard to predict so far in future)
-Needs to be updated when something could affect cash flow
-Only forecast for one situation
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What 3 factors could affect the predictions of the forecasted cash flow?
-The performance of the asset
(may not be used often)
What should be considered before capital investment?
-Who is making the predictions(e.g manager/biast)
-How relevant/accurate is information
-Possible risks with the figures quoted
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What are the 2 methods of investment appraisal?
-The payback method (PP)
-The net present value method (NPV)
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What is the payback method?
Calculate the time taken for the equipment to generate sufficient net cash flow to pay for itself
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What is the benefit of a short pay-back?
Less interest rates
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What are 3 advantages of the payback method?
-Payback allows comparison for machines
-Easy to calculate-no accountant needed
-Payback aids decision making
(outlines best option)
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What are 3 disadvantages of payback method?
-Ignores profits made from machinery/investment
-Ignore the time value of money
(money better now than later)
-Data is estimated/inaccurate
(predictions/assets depreciate)
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What does the NPV method take into account?
The size of the cash inflows over the life of the equipment ,but also makes an adjustment for the timing of the money
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What does discounted cash-flow mean?
Money in the future is worth less than what it is right now
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What does the NPV method calculate?
The rate of return on an investment project taking into account the effects of interest rates and time
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What are 3 advantages of NPV method?
-Takes the timing of cash flows into account
-Takes into account the discount factor
(more realistic figures)
-See how much return the investment produces
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What are 3 disadvantages?
-More difficult to calculate (need an accountant)
-The discount factor can be manipulated
(not accurate)
-Doesn't consider qualitative info.
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What are 3 risks/uncertainties in investment appraisal?
-Length of the project
(greater risk)
-Experience of management team
(need to have similar experience to lessen risk)
What are 3 qualitative issues regarding capital investment?
-Objectives of the firm
(e.g to survive, not going to invest lots)
-Past experience
(May not buy from an unknown supplier )
-State of the economy
(The timing of when to invest)
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What would a final judgement be in a conclusion on NPV?
To mention to use the method alongside decision trees/ratios etc
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Other cards in this set
Card 2
Front
Why would a business undertake capital investment?
Back
-To replace existing equipment
(improve productivity)
-To expand productivity
(Meet customer demand)
-To reduce the production costs
(Use money elsewhere)
-Assets depreciate in value
(Replace before assets are worth too little)
Card 3
Front
Why does capital investment involve an element of uncertainty?
Back
Card 4
Front
Investment appraisal techniques are designed to aid?
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