Capital Investment Appraisal Flashcards
Capital Investment
The investment of capital in NCA go help businesses generate profits.
Capital Investment Methods
Payback
Net Present Value
Payback Advantages
Simple to understand and calculate,
Focuses on quick recovery of cash, liquidity and risk minimisation.
Payback Disadvantages
Ignores cash flows after payback,
Doesn’t take into account the time value of money.
Net Present Value
Sum of all the present values (NCF x DF).
NPV Decision Rules
If positive - ACCEPT. Covers more than the cost of capital.
If negative - REJECT. Will not cover the cost of capital to be invested.
NPV Advantages
Gives greater weighting (importance) the cash flows in the early years, as they are less risky.
Discount Factor Advantages
Accommodates for the risk of long term projects by converting all the future cash flows to a common ‘todays money value year 0 basis’.