3.7.8

Question 1

Which 5 circumstances do businesses take decisions in regarding investment?

Answer 1

1. when contemplation expanding introducing new product
2. expansion
3. investing in new technology
4. investing I infrastructure
5. in other decisions

Question 2

define investment appraisal

Answer 2

a series of techniques designed to assist businesses in judging the desirability of investing in particular products.

Question 3

what are the 3 most important investment appraisal techniques?

Answer 3

1. payback
2. ARR
3. NPV

Question 4

what 3 assumptions do investment appraisal techniques depend on?

Answer 4

1. all cots and revenues can be easily and accurately forecast for some years into he future
2. key variables will not change
3. the business in question is seeking maximum profits

Question 5

what 2 things do managers consider when deciding to invest I current or non-current assets?

Answer 5

1. total profits earned by the investment over the foreseeable future
2. how quickly the investment will cover its costs

Question 6

what 4 reasons can forecasts about future revenues be inaccurate?

Answer 6

1. competitors reducing prices or introducing new products can effect sales
2. changes in buyer habits and demands
3. recessions or slump
4. inflation and rising import prices can

Question 7

define payback

Answer 7

measure how log it takes an investment to break even from the initial cost.

Question 8

how do you calculate payback?

Answer 8

latest cumulative return in negative / (total net profit in CR positive / 52 weeks)

Question 9

what are 3 benefits fo payback?

Answer 9

1. simple and easy to calculate and understand
2. focus on cash/cashflow - which is scares
3. focus on speed of return is good for rapidly changing markets

Question 10

what are 3 drawbacks of payback?

Answer 10

1. ignores cashflows after the payback has been reached
2. doesn’t calculate profit and ignores qualitative aspects
3. no account of the “time value if money”

Question 11

define ARR

Answer 11

average rate of return.

calculates the % rate of return on each investment

Question 12

how do you calculate ARR?

Answer 12

100((total net return or surplus from profit / # of years) / initial cost)

Question 13

what are 3 benefits of ARR?

Answer 13

1. an be compared with target return
2. looks at hole profitability of the project
3. focuses of profitability, a key issue for shareholders

Question 14

what are 3 drawbacks are ARR?

Answer 14

1. does not take into account cash flow
2. no account for “time value of money”
3. treats profits arising last as the same as those driving early

Question 15

define discounting

Answer 15

the process of reducing the value of future income to reflect the opportunity cost of an investment

Question 16

define opportunity cost

Answer 16

the best alternative foregone as a result of a decision

Question 17

define present value

Answer 17

the value of a future dream of income from an investment, converted into a current worth.