capital investment appraisal Flashcards
management : chapter 14
what is the formula for the payback method ?
what you need / what you have x 12 (months) OR 365 (days)
benefits of the payback method :
- easy to calculate
- easy to understand
- ideal for high tech projects
drawbacks of the payback method :
- based on estimates
- effect of things such as inflation are ignored
- any cash flow after payback achieved is ignored
what does npv stand for ?
net present value
what does dcf stand for ?
discounted cash flow
what is net present value/discounted cash flow ?
this is when the cost of money is taken into consideration
what is used when calculating the net present value ?
a discount factor
benefits of the net present value method :
- all cash flows considered
- time value of money considered
- timing of cash flows considered
drawbacks of the net present value method :
- based on estimates
- cost of capital may vary over life : not taken account of
- highest npv project does not always represent best choice : other factors play their part
what must be added back and why ?
depreciation
must be added back as a cash flow as it is a non cash expense
what factors must be considered when businesses making decisions ?
internal and external
what internal factors affect business decision making ?
- effect on cash
- effect on profit
what external factors affect business decision making ?
- effect on environment
- legal requirements
- effect on the economy
- effect on employees
social factors :
(non-financial)
- economic climate
- political implications
- time
- training
- location
- capacity
- product life
financial factors :
- sources of finance
- cost of capital
- estimated cost of project
- tax implications
- working capital requirements
