l10 : planning & controlling capital expenditure

Question 1

give 5 criticisms of UK investment performance.

Answer 1

1. payback vs NPV
2. myopic management
3. ARR
4. myopic stock
5. real investment options

Question 2

what are the 6 steps for preparing capital budgets in practice?

Answer 2

1. search for investment opportunities
2. screening (feasibility / consistency check)
3. definition of project & alternatives
4. evaluation
5. authorisation (corp mgt approval required for expenditures > £50k)
6. monitoring & post-audit (review of performance of project)

Question 3

what are post-completion audits?

Answer 3

audits carried out to control capital expenditure. improves the quality of existing and future decisions. can enable corrective action on existing projects.

Question 4

give 2 problems with implementing post-completion audits.

Answer 4

1. measuring incremental cash flows is difficult and subjective
2. have to use accounting measures of performance (historical cost, acct depreciation, inflation)