Capital Investment Appraisal

Question 1

Definition of Capital investment Appraisal

Answer 1

Uses two main methods to help in decision-making being Payback period and Net present value.

Question 2

Benefits of Business’ using Capital investment appraisal

Answer 2

Enables a business to make decisions as to whether or not to invest in a particular capital investment project

Question 3

Definition of payback period

Answer 3

The time length it takes for the initial cost of a capital investment to be repaid from net cash flows.

Formula = initial investment / annual cash flow

Question 4

Definition of Net present Value

Answer 4

Recognises that money has a time value - It compares net cash flows,

Question 5

Definition of Discount Factor

Answer 5

compares net cash flows, at their present values, with the initial cost of the capital investment to give a net present value of the capital project,

helps minimising cost

Question 6

Definition of Cost of Capital

Answer 6

Is the percentage cost of financing an investment , Plus the rate of interest it has to pay when borrowing

Question 7

Advantages & disadvantages of Payback period

Answer 7

Advantages:
Easy to calculate​

Places emphasis on early cash flows​

it uses cash flows, not accounting profit.​

Disadvantages:

Ignores the impact of inflation and time value of money​

Estimate of cash flow may be incorrect​

it ignores project profitability