Capital Investment Decisions 2 Flashcards
Give an example of the timing of cash flows
1 pound received in one year does not have the same value as 1 pound received today
What are the reasons for the difference in value
– Interest lost / opportunity cost - risk - inflation These factors will influence of return required by an investor
What does NPV take into account
The timing of cash flows
To be accepted a project must achieve what
A positive NPV
What does a positive NPV do
It increases the wealth of the business
There is more than one competing project with the positive NPV what happens
The one with the highest NPV should be chosen
List Three examples of NPV
– Takes account of the time value of money
- includes all the relevant cash flows
- considers impact of a project on owners wealth
List two disadvantages of NPV
– Choosing a discount rate – doesn’t provide a rate of return
What is internal rate of return
Discount rate that will produce an NPV of zerofor project
How is internal rate of return expressed
As a percentage
How is internal rate of return calculated
Using trial and error or by using a spreadsheet
For this module you do not need to know how to calculate internal rate of return
But you do need to know advantages and disadvantages
To be accepted a project must achieve what
A minimum internal rate of return requirement
If there is more than one competing project what happens
If there is more than one competing project the one with the highest internal rate of return should be chosen
What are the advantages Of internal rate of return
– Takes account of the time value of money
- includes all the relevant cash flows
Expressed as a percentage so it’s easy to compare expressed as a percentage so it easy to compare
