finance lec 3 - capital investment appraisal Flashcards
what do organisations generate revenue through
use of assets
assets can be
human or equipment
but assets depreciate so this means htey may not
function they same was as when 1st brought
assets depreciating may lead to
detoriation in perforamnce/functionality
since assets depreciate and you wanna operate as you did before what must you do
repair / buy new assest
capital investmeent descisons related to
descision in investmetn and renewal of assets
what is one of fthe most imp resources of a compapny
cash
cash is x
reagardless of
limited
size of company
capital investment process
generate ideas
search out relevant info
id possible alt
determining specific project details
sddedding financial condequences related to
cost
cf
factors affecting cf
assessing non financial consequence
what may not always be best decsison
what should you consider(3) things
biggest number not always best desicsion
consider cmopany reputation
consdier mission and direction of company
when considering relevant cashflows what shoudl be on our checklist
5 things
sunk costs
apportioned fixed cost
opportunity cost
interest/interest charge is not a relevant cf
irrelevant cashflow
when is a sunk cost irrelelant
if already been incurred
when are apportioned fixed csots irrelevant
if remain fixed and still incurred whether project goes ahead or not
when are apportioned fixed costs relevant
e.g semi fixed cost
increase factory usage - og rent = 1000 new rent = 1500
interested in 500 increase
rent increase but interested in the increase
is opportunity cost relevant and must it be taken into account
YES
give e.g of opp cot
either use building for own production facilities or rernt for 150000
oc - 15,000 - very relevant and must be taken into account
interest is also teh
discount rate
why is interest/interest charge not a relevant cf
raken into accouint through dicsspunt rate/cost of captial
what is an irrelevant cahflow
depreciation charge - as not paying to anyone
if NPV at any rate is negative what do we say about te IRR
it doesnt exist
if give you a perpetuity/ investment appriasl question with rev vc and fc - how do we w/o
net annualk cf = rev - tc
if got t work out NPV of a perpetuity cf how do you go about this
do the intiial cost and only one year
your differnce will give you NPV of your perpetuity
