Making Investment decisions

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Firms can forecast future earnings arising from an investment with more certainty if
1) The market is stable, 2) Competitors actions are predictable, 3) High - quality data is avaliable
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What are the 3 types af appraisal scheme
1) Payback, 2) Average rate of return, 3) Net present value
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Payback
Evaluates the time taken to recover the original out lay put into an investment (See separate sheet for method)
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Average Rate of return
Assesses the worth of an investment by calculating the yearly % of sum invested
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ARR Calculation
Average annual net profit / Initial investment X100
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Net Present Value
Coverts earnings from an investment into present value
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Investment criteria - 2 things
1) rate of the investment & 2) other possible investments
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Risk is...
The chance of something adverse or bad happening
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Investment decisions can go wrong in 2 ways
1) costs may be higher than forcast 2) Sales may be lower
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4 Qualitative factors that affect investment decisions
1 - Business's objectives, 2 - The image of the business, 3 - Industrial relations, 4 - Amout of risk a business is willing to accept
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The business's objectives
Firms seeking to expand market share may be more willing to invest in projects with a higher risk
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The image of the business
Some b.s seek to appeal to a new age range (Virgin) so invest in projects that will enhance their image
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Industrial relations
Major investments have significant implications for the work force - redundicies, retraining...
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The amout of risk the business is willing to accept
This will depend on a number of factors, not least the attitudes of the management team
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Card 2

Front

What are the 3 types af appraisal scheme

Back

1) Payback, 2) Average rate of return, 3) Net present value

Card 3

Front

Payback

Back

Preview of the front of card 3

Card 4

Front

Average Rate of return

Back

Preview of the front of card 4

Card 5

Front

ARR Calculation

Back

Preview of the front of card 5
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