3.3 Flashcards
1
Q
investment
A
- purchase of capital goods
- expenditure by a business that is likely to yield a return in the future
2
Q
investment appraisal
A
- describes how a business might evaluate an investment project to determine if it is likely to be profitable
- allows businesses to compare investment projects
- involve the use of capital cost and net cashflow
3
Q
methods of investment appraisal
A
- payback period (time)
- average rate of return (%)
- discounted cash flow (£)
4
Q
payback period
A
time it takes for a project to repay its initial investment
5
Q
benefits of using payback period
A
- simple and easy to calculate
- focuses on cash flows
- emphasises speed of return
- straightforward to compare competing projects
6
Q
drawbacks of using payback period
A
- ignores cash flows after payback is reached
- takes no account of the ‘time value of money’
- may encourage short term thinking
- ignores qualitative aspects of a decision
- doesn’t create a decision for the investment
7
Q
average rate of return (ARR)
A
- annual percentage return on an investment project based on average returns earned by the project
- calculation (%) = net return per annum / capital outlay (cost) x 100
8
Q
benefits of using average rate of return (ARR)
A
- simple to understand
- easy to calculate
- focuses on overall profitability of an investment project
- easy to compare with other key target rates of return
- uses all the returns generated by a project
9
Q
drawbacks of using average rate of return (ARR)
A
- ignores the timing of returns
- focuses on profits instead of cashflows
- doesn’t adjust for the time-value of money
10
Q
critcial path analysis (CPA)
A
- improves the management of time and resources
- uses network diagrams
- helps a business organise its jobs and tasks, as well as planning, organising and resource management
11
Q
purpose of a critical path analysis
A
- efficiency
- decision making
- time based management
- working capital control
12
Q
network analysis
A
- helps a business manage projects effectively
- allows the business to find the sequence or path of tasks that are critical to the project
13
Q
features of a network
A
- arrows and lines = tasks/activities
- tasks can be carried out together
- arrows and lines cannot cross
- each tasks takes a certain amount of time
- tasks must be completed in a certain order
- circles (nodes) = show the start and finish of a task/activity, contain information about the timing of a project
- always a node at the tart and end of a project
14
Q
earliest start times (EST)
A
- top right of nodes
- calculated by moving left to right across the diagram
- adding up the numbers to find the largest
15
Q
latest finish times (LFT)
A
- bottom right of nodes
- calculated by moving across the diagram right to left
- subtracting the numbers to find the smallest
