Investment Appraisal Flashcards
What are the limitations to replacement analysis apply to a fleet of van (5)
Exam tip
Ignores the impact of inflation, ignore the impact inflation will have on the MV of a fleet of vans and there trade in value
Ignore taxation - changes to capital allowance changes in tax rate
Technological advances will mean that regular replacement is preferred. Electric vehicles becoming more accesable and popular.
Consider the cash flow of replacement
How far ahead can estimated be made and with what clarity
Compare between figures is there little difference between 1 & 4years
What is the difference between a positive figure and negative figure when it comes to replacement anaylysis.
Positive - Annual equivalent net revenue - choose the highest
Negative - Equivalent annual costs choose lowest
What is the difference between imposin hard and soft capital rationing
Hard - Business can not get the finance it needs to invest in all projects because of souces of finance (e.g bank investors)
Soft - refers to internall imposed budgets/ restriciton (time, resources budgets)
What if somthing is paid on the 1st day of the year.. what else do you need to consider
If something is paid on the 1st day of the year for NPV anaylsis we say it has been paid on the last day of the previous year
HOWEVER we must consider the tax element the tax man will not want the tax till the end of the that year. Work out tax as usual and adjust by adding and subtracting across the years
What are the real options
FAT G
Follow on option (new product)
Abandonment (not as much invested in expensive P&M)
Timing option (delay)
Growth (move into new sector slow burner)
How do we work out the equivalent annual cost
PV / AF
Explain Shareholder value analysis
The value of a company is driven by the NPV of all its expected future cash flows
SLOW CAT Sales and growth Life of a project Operating margin Working capital efficiency Cost of capital A CAPEX Taxation
List the limitations of expected values
Discrete outcome
subjective probabilities
ignores risk
not a possible outcome so less applicable to one of projects
What are the limitation of sensitivity analysis
Assumes variables change independently of each other
Does not assess the likelihood of a variable changing
Does not identify a correct decision
Explain the linear regression model
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Statistical technique that identifies the factors that are associated with the change of a key variable The relationship between the dependent variable and the independent variables
Easy to explain to non financial minded people
Not always a linear model
Does not consider causation and correlation
Decision tress
Looks at the impact of different decision on the outcome
Simple to explain
can be used to consider multiple decisions
Large tree difficult to interpret
Simulation Monte Carlo
Creates a distribution of the possible outcomes
Provides information about the possible outcomes and their SENSITIVITY
Does no identify a correct decision
Time consuming and complex
expensive
Assumptions made
Systematic Risk
Non Systematic
Non systematic - company industry … diversifying almost eliminates
Systematic - Economy can not eliminate
What is interest rate parity
Difference in interest rates can not be exploited as the forward rate will adjust to offset any differences
Forward rate = 1+OS IR
————
1+ UK UR
What is money value equation
1+ Money = (1 + real)*(1+inflation)
