Chapter 5: Investment decision

Question 1

Annuity:

Answer 1

A series of equal cash flows

Question 2

Capital expenditure

Answer 2

Expenditure which results in the acquisition of non-current assets or an improvement in their earning capacity. It is not charged as an expense in the statement of profit or loss; the expenditure appears as a non-current asset in the statement of financial position.

Question 3

Revenue expenditure

Answer 3

Charged to the statement of profit or loss and is expenditure which is incurred:
* For the purpose of the trade of the business – this includes expenditure classified as selling and distribution expenses, administration expenses and finance charges
* To maintain the existing earning capacity of non-current assets

Question 4

Internal rate of return (IRR):

Answer 4

A discounted cash flow technique that calculates the percentage return given by a project. If this return is used to discount a project’s cash flows, it would deliver an NPV of zero.

Question 5

Opportunity cost

Answer 5

A cost incurred from diverting existing resources from their best use.

Question 6

Payback period

Answer 6

A measure of how long it takes for the cash flows affected by the decision to invest to repay the cost of the original investment.

Question 7

Perpetuity

Answer 7

: An annuity that occurs for the foreseeable future.

Question 8

Relevant cash flow:

Answer 8

A future incremental cash flow caused by a decision (eg to invest in a project).

Question 8

Present value:

Answer 8

The cash equivalent now of money received (or paid) in the future.