Capital Investment Appraisal Flashcards

1
Q

Capital Investment

A

The investment of capital in NCA go help businesses generate profits.

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2
Q

Capital Investment Methods

A

Payback

Net Present Value

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3
Q

Payback Advantages

A

Simple to understand and calculate,

Focuses on quick recovery of cash, liquidity and risk minimisation.

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4
Q

Payback Disadvantages

A

Ignores cash flows after payback,

Doesn’t take into account the time value of money.

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5
Q

Net Present Value

A

Sum of all the present values (NCF x DF).

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6
Q

NPV Decision Rules

A

If positive - ACCEPT. Covers more than the cost of capital.

If negative - REJECT. Will not cover the cost of capital to be invested.

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7
Q

NPV Advantages

A

Gives greater weighting (importance) the cash flows in the early years, as they are less risky.

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8
Q

Discount Factor Advantages

A

Accommodates for the risk of long term projects by converting all the future cash flows to a common ‘todays money value year 0 basis’.

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