E- Finance CH4 Flashcards
What is capital investment appraisal
Long-term investment related to production or operation of business
What are the financial factors affecting firm’s capital investment decision
- Investment costs
- cash outflow - Investment income
-cash inflow - Investment horizons
- duration is important because long projects can lock up firm’s capital for a long time - Time value of money
- Dollars received today is worth more than a dollar received in future - Riskiness of project
What are the non-financial factors affecting the firms capital investment decisions
- Stretegic reasons
- Regulation compliance
- Meeting industry standards
- Improving company image
- Improving staff morale
What is capital investment appraisal
analytical process of selecting the best capital investment projects
What is accounting rate of return and its +/-
Measure of annual rate of return per dollar generated of avg investment
+simple caculations
+easy to understand ( in %)
-ARR use profit instead of cashflow
-Time value of money is ignored
What is payback period and it’s +/-
The time taken to recover the investment
+simple to caculate and easy to understand
+can help identify risky projects
-ignore time value of money
-subjective decision making and arbitary when determining targeted pb.p
What is net present value and it’s +/-
present value of future net cash inflow, less the initial outlay
+time value of money is considered
+all cash inflow is considered, so can compare investment projects fairly
+expressed in monetary terms and is directly linked to the firm’s value
-hard to understand for managers with no training
-caculating the NPV is difficult
What is internal rate of return and it’s +/-
The discount rate at which NPV of project is 0
+covers the time value of money
+all cash inflow is related to the project
+easy to understand
-complicated caculation
-managers can’t access how much the project will increase firm’s value ( expressed in %)
