Financial Investment Appraisal Techniques

Question 1

are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period.

Answer 1

Capital Expenditures

Question 2

are typically referred to as ongoing operating expenses, which are short
term expenses that are used in running the daily business operations.

Answer 2

Revenue Expenditures

Question 3

is the process of planning and controlling the costs associated with running a business.

Answer 3

Cost Management

Question 4

is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.

Answer 4

Cost-benefit Analysis

Question 5

Key Non-Financial Factors for Investment

Answer 5

1. meeting the requirements of current and future legislation.
2. matching industry standards and good practice
3. improving staff morale, making it easier to recruit and retain employees.
4. improving relationships with suppliers and customers.
5. improving your business reputation and relationships with the local community.
6. developing the capabilities of your business, such as building skills and experience in new areas or strengthening management systems.
7. anticipating and dealing with future threats, such as protecting intellectual property against potential competition.

Question 6

Investment Appraisal Techniques to Capital Expenditure Decisions:

Answer 6

Net Present Value
Payback
Accounting Rate of Return
Internal Rate of Return

Question 7

is one of the capital budgeting techniques used in decision making for investment appraisal where it covers the time period for recovering the initial investment at minimum time period

Answer 7

Payback Period

Question 8

is another recognized capital budgeting techniques used in decision making for investment appraisal where it helps to rank the projects valuation according to their net earnings.

is confirmed as the ratio of calculating the net earnings of the profits against the net investment of the project.

Answer 8

Accounting Rate of Return

Question 9

is the most acceptable techniques in capital budgeting techniques used in decision making for investment appraisal.

is the difference between summation of discounted cash inflows and the summation discounted cash outflows.

Answer 9

Net Present Value

Question 10

is the most popular techniques in decision making purpose of investment. It is the concept of considering discount rate where the result of NPV, Net Present Value is equals to zero, or remains zero.

is also recognized as DCF-Discounted Cash Flow Technique and it is interrelated with time value of money.

Answer 10

Internal Rate of Return

Question 11

is a statistical term describing two or more events that cannot happen simultaneously.

is commonly used to describe a situation where the occurrence of one outcome supersedes the other.

Answer 11

Mutually exclusive

Question 12

the annual cost of owning, operating and maintaining an asset over its entire life.

Answer 12

Equivalent Annual Cost

Question 13

is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

Answer 13

Inflation

Question 14

is a term for whena taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents.

Answer 14

Taxation

Question 15

is a process that companies use to decide which investment opportunities make the most sense for them to pursue.

the typical goal is to direct a company’s limited capital resources to the projects that are likely to be the most profitable.

Answer 15

Capital Rationing

Question 16

is concerned with the mathematical derivation, description and analysis of methods of obtaining numerical solutions of mathematical problems.

Answer 16

Capital Rationing Numerical Analysis
(Numerical analysis)

Question 17

refers to the situation where the shortage of funds is limited to one period only, while it is anticipated that sufficient funds will be available in subsequent periods.

Answer 17

Single-Period Capital Rationing

Question 18

refers to the situation where the shortage of funds is expected to extend over a number of periods.

Answer 18

Multi-Period Capital Rationing

Question 19

involves applying capital budgeting principles to determine if leasing as asset is a better option than buying it.

Answer 19

Lease or buy decision

Question 20

in a contractual arrangement in which a company (the lessee) obtains an asset from another company (the lessor) against periodic payments of lease rentals.

Answer 20

Leasing

Question 21

involves purchase of the asset with company’s own funds or arranging a loan to finance the purchase.

Answer 21

Buying the asset

Question 22

refers to the cost that it must pay in order to raise new capital funds.

Answer 22

Cost of Capital

Question 23

measures the returns demanded by investors who are part of the company’s ownership structure.

Answer 23

Cost of Equity

Question 24

is the effective rate that a company pays on its current debt as part of its capital structure.

Answer 24

Cost of Debt

Question 25

is the average rate that a business pays to finance its assets.

it is calculated by averaging the rate of all of the company’s sources of capital (both debt and equity), weighted by the proportion of each component.

Answer 25

Weighted Average Cost of Capital

Question 26

is the rate obtained by combining an expected risk premium with the risk-free rate during the calculation of the present value of a risky investment.

is an investment such as real estate or a business venture that entails higher levels of risk.

Answer 26

Risk-adjusted Discount Rate

Question 27

says that a firm’s value increases to a certain level of debt capital, after which it tends to remain constant and eventually begins to decrease if
there is too much borrowing.

This decrease in value after the debt tipping point happens because of overleveraging.

Answer 27

Traditional Theory of Capital

Question 28

is a crucial decision that is to be made by the financial manager, the decision is about the financing-mix of an organization.

is focused on the borrowing and allocation of funds required for the investment decisions of the firm.

Answer 28

Financing Decision

Question 29

Techniques of Measurement on the Effect of Risk Capital Expenditures and Decision Making

Answer 29

Risk and Uncertainty
Risk Attitude
Models for Incorporating Risk
Decision Trees
Sensitivity Analysis and Optimism Bias
Simulation
Adjusted Payback

Question 30

is the outcome of an action taken or not taken, in a particular situation which may result in loss or gain.

it is termed as a chance or loss or exposure to danger, arising out of internal or external factors, that can be minimised through preventive measures.

Answer 30

Risk

Question 31

means the absence of certainty or something which is not known.

it refers to a situation where there are multiple alternatives resulting in a specific outcome, but the probability of the outcome is not certain.

Answer 31

Uncertainty

Question 32

are terms used to describe an investors level of risk they are willing to take when choosing investments to reach their savings goal.

Answer 32

Attitude to risk or “risk appetite or “risk reward profile

Question 33

is a discount rate that is added to the risk-free rate of borrowing.

The risk-free rate is the rate of return of low-risk investments such as government-backed securities. The investments are then appraised using the resulting discount rate. Investments that offer better returns are chosen.

Answer 33

Risk Premium

Question 34

The time it takes for a project to pay back the amount of money invested is a matter of concern to the investor. Investors set a time limit within which they expect to receive returns. Each project’s cash flow is determined.
A project whose return falls beyond the time limit will deemed to be risky.

Answer 34

Payback Period

Question 35

These measures do not give a true picture of future events.
To avoid uncertainty, convert expected future cash flows into certain cash flows.
Certain cash flows are cash flows obtained by multiplying uncertain cash flows with a predetermined base known as certainty-equivalent coefficient.
A certainty-equivalent coefficient is factor that determines the risk associated with future cash flows.
Risky investments have a low certainty equivalent rating, hence they are avoided.
This is because the probability of netting the estimated cash flows is unlikely.

Answer 35

Certainty Equivalent

Question 36

measures the extent to which the project’s cash flows change in response to changes in one of these factors.

involves identifying the factors that influence the project’s cash flows, establishing a mathematical relationship between these factors and analyzing how a change in
each of these factors affect the project’s cash flows.

If a project’s cash flows are sensitive to changes in any of the above-listed factors, it is considered risky and hence avoided.

Answer 36

Sensitivity Analysis

Question 37

involves visually outlining the potential outcomes, costs, and consequences of a complex decision.

these trees are particularly helpful for analyzing quantitative data and making a decision based on numbers.

Answer 37

Decision Tree Analysis

Question 38

is defined as the length of time it takes the net cash revenue/ cash cost savings of a project to payback the initial investment.

Answer 38

Adjusted Payback/Payback

Question 39

the amount of time it takes to recover the cost of an investment.

Answer 39

Payback Period