Financial Management

Question 1

Investment

Answer 1

foregoing consumption now in anticipation of the opportunity to consume more in the future

Question 2

Project

Answer 2

a particular opportunity to invest

Question 3

What does Investment Appraisal involve?

Answer 3

The identification of future cash flows which are relevant to the project, estimate the scale of future cash inflows and outflows, ascertain the timing of these cash inflows and outflows, comparison with the set standard or among projects to determine their suitability

Question 4

Investment Decision

Answer 4

requires a considerable financial outlay with returns over an extended time period

Question 5

Returns

Answer 5

Annual accountancy profits (percentage of investment made)

Question 6

Capital Rationing

Answer 6

When more than one project is available, we need to decide which one to invest in. Must consider risk and uncertainty, monetary returns, non-monetary business objectives

Question 7

Name the Main Appraisal Techniques

Answer 7

All of these techniques consider cash flows rather than profits: 
Accounting rate of return
Payback return
Net present value
Internal Rate of Return

Question 8

Accounting Rate of Return

Answer 8

The formula:

ARR = Average Expected Return / Average Capital Investment

Question 9

Payback Period

Answer 9

The length of time it takes for an initial investment to be repaid out of the net inflows of the project

Question 10

Cost of Capital

Answer 10

The discount rate a business used for investment appraisal

Question 11

Net Present Value

Answer 11

the total of present values.

• if it is positive, the project should be accepted and if it is negative, the project should be rejected,
• if the NPV = 0, the investor is indifferent whether to invest or not

Question 12

Internal Rate of Return

Answer 12

the discount rate that when applied to its future cash flows will produce an NPV of 0
it represents the return from a business opportunity