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Business - A Level 2 > 3.3 > Flashcards

3.3 Flashcards

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1
Q

definition of investment appraisal

A

process of analyzing whether investment projects are worthwhile

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2
Q

three main methods of investment appraisal

A
  • payback period (time)
  • average rate of return %
  • discount cash flow (NPV) £
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3
Q

payback period

A

time it takes for a project to repay its initial investment

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4
Q

benefits of using a payback period

A
  • simple to calcultate
  • focus on cash flows
  • emphasizes speed of returns
  • comparable
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5
Q

drawbacks of using a payback period

A
  • ignore cash flows after payback has been reached
  • no account of the “time value of money”
  • ignores qualitative aspects of the decision
  • Short-term thinking
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6
Q

what is ARR

A

annual % return on an investment project based on average returns earned by the project

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7
Q

equation for ARR

A

total net cash - initial investments =A
A / initial investments x 100 = B
B / years = ARR

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8
Q

benefits of using ARR

A
  • simple to understand and calculate
  • comparable with other target rates
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9
Q

drawbacks of ARR

A
  • ignore timings of result
  • focuses on profits rather than cash flows
  • not adjusted for time-value of money
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10
Q

NPV

A

calculates the monetary value now of a projects future cash flow

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11
Q

discounting definition

A

method used to reduce the future value of cash flows to reflect the risk that they may not happen

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12
Q

what is the time-value of money

A
  • better to receive cash now then in the future
  • future cash flows are worth less
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13
Q

NPV calculation

A

net cash flow x discount factor

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14
Q

NPV analysis

A

NPV - initial investment

+ve = accept project
-ve = reject project

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15
Q

benefits of NPV

A
  • considers all future cash flows
  • reflects risks
  • different levels of risks can be accounted for by adjusting the discount rate
  • straightforward decision
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16
Q

drawbacks of NPV

A
  • choosing the discount rate is hard - as you do not know what the future bank interest rate will be
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17
Q

what is network analysis

A

technique used to identify the order in which all activities need to be completed when planning a complex project

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18
Q

how do network and critical path diagrams work

A

organise activities to show which activities can be done simultaneously and which are dependent on earlier activities

19
Q

what does a critical pathway identify

A

the shortest time in which a project can be completed

20
Q

network diagrams features:

A
  • made up of 3 nodes
  • EST earliest start time (top, right)
  • LFT - latest activity can finish without delaying the project
  • the node number based on the order in which it is drawn
21
Q

what does the LFT on the final node need to match

A

matches the EST on that node

22
Q

What happens when two or more activities of in the same node for LFT

A

choose the lower number

23
Q

critical path analysis advantages

A
  • shorten overall tiem of proejct
  • allows for just in time
  • identifies critical activities
  • improves focus on the projects
24
Q

critical path analysis disadvantages

A
  • relies on estimations
  • doesn’t take into account external influences
  • large projects can be to complex for CPA
25
Q

what is the total float

A

the amount of time an activity can be delay without affecting the end time of the entire project

26
Q

total float formula

A

LFT this activity - duration - EST this activity

27
Q

what is free float

A

amount of time that a task can be delayed without delaying the following task

28
Q

free float formula

A

EST next - duration - EST this

29
Q

what does a negative NPV mean

A

the firm could get a better return by putting their money in a savings account, than going ahead with the project

30
Q

a positive of critical path analysis

A

firms can forecast their cash flow, as definitive start times allow the firm to budget accurately, and know what activities need cash

31
Q

two approaches to sales forecasting

A
  • extrapolation
  • correlation
32
Q

extrapolation definition

A

uses trends established from historical data to forecast the future

33
Q

moving averages used in extrapolation

A
  • moving average takes a data series and “smooths” the fluctuations in data to show an average
  • the aim is to take out extreme data
34
Q

factors to consider with moving averages

A
  • product life cycle
  • pace of technological innovation
  • growth of the global economy
  • market saturation
35
Q

extrapolation
advantages

A
  • simple method of forecasting
  • mot much data required
  • quick and cheap
36
Q

extrapolation
disadvantages

A
  • unreliable due to fluctuations in historical data
  • assumes past trends will continue
  • ignores qualitative factors
37
Q

correlation definition

A

looks at the strength of a relationship between two variables

38
Q

correlation variables

A
  • indpendant variables - change
  • dependant variables - measure
39
Q

what is the regression line

A

plots the mathematical relationship between the variables based on the data points

40
Q

how to work out if you have a strong correlation

A

there is little room between the data points and the line of best fit

41
Q

how to work out if you have a weak correlation

A

the data points are spread quite wide and far away from the line of best fit

42
Q

factors affecting sale forecasts

A
  • consumer trends
  • economic variables
  • competitor actions
43
Q

circumstances where sales forecasts are likely to be inaccurate

A
  • start-up business
  • disruption of technological change
  • changes in market share
  • management that have demonstrated poor forecasts in the past

Business - A Level 2 (4 decks)

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