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Management Case Study > P2 - 8. Long Term Decision Making > Flashcards

P2 - 8. Long Term Decision Making Flashcards

1
Q

What are the 7 steps in investment project appraisal/implementation?

A
  1. Identify the range of possible projects
  2. Initial feasibility screenings
  3. Detailed project analysis (financial + impact)
  4. Go/ no go decisions made
  5. Project implementation
  6. Project control
  7. Post completion audit
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2
Q

What should be included in a capital budget?

A

Projects that have already started as well as those that are due to start

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3
Q

What 2 reasons might capital be rationed?

A
  1. Internal reasons (soft rationing)

2. External reasons (hard)

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4
Q

What 3 controlling questions should be asked during the defining phase of a project?

A
  1. Is it worth initiating a project
  2. What staff would be on the team
  3. What are the general goals
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5
Q

What 3 controlling tasks should be carried out during the planning phase of a project?

A
  1. Constructive plan to accomplish the goals
  2. Feasibility studies
  3. Finding out what the customer really wants
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6
Q

What 3 controlling tasks should be carried out during the implementing phase of a project?

A
  1. Co-ordinate people and resources
  2. Design and test the product
  3. Run product trials
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7
Q

What 2 tasks should be carried out during the controlling phase of a project?

A
  1. Review whether the project deliver against its targets

2. Make any necessary corrections

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8
Q

What 2 tasks should be carried out during the completing phase of a project?

A
  1. Formally accept the project

2. Arrange a review

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9
Q

What is a post completion audit?

A

An objective assessment of the success of a capital project vs plan, providing feedback to aid implementation and control of future projects

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10
Q

What are the 4 main benefits of post completion audits?

A
  1. If in a timely fashion can also implement changes to the current project
  2. Holds managers accountable so leads to better performance
  3. Highlights systems weaknesses
  4. Highlights high calibre personnel
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11
Q

What are the 3 main disadvantages of post completion audits?

A
  1. May make managers too cautious and stifle creativity
  2. Can be expensive to do
  3. Difficult to assess intangible costs and benefits
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12
Q

What are the 5 main costs involved in gathering high quality data?

A
  1. Direct data capture
  2. Processing costs
  3. Database costs
  4. Personnel and systems involved in data analysis
  5. System security costs
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13
Q

What are the 5 main benefits of high quality data?

A
  1. Greater confidence in data among management
  2. Improved decision making
  3. Better understanding of external environment
  4. Helps become more efficient and reduce costs
  5. Less time reconciling data
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14
Q

What are the 5 most common problems with data quality?

A
  1. Huge volumes of data difficult to collate and summarise
  2. Huge variety of data makes trends hard to spot
  3. Out of date data retained
  4. Human error on input or analysis
  5. Security concerns
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15
Q

What is a business intelligence system?

A

A tool that helps organisations improve decision making by tracking, processing, storing and analysing data

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16
Q

What are the 4 benefits of using BIS?

A
  1. Make the right decisions at the right time
  2. Cut costs
  3. Identify new business opportunities (competitor information)
  4. Improving organisational performance
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17
Q

What are the three steps of implementing BIS?

A
  1. Define roles in the organisation
  2. Define what information is needed to make better decisions
  3. Design and build the system
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18
Q

What makes a successful BIS?

A
  1. High quality data
  2. Regularly evaluating and adjusting targets
  3. Senior management involvement to develop culture
  4. Discuss both negative and positive performance
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19
Q

What is the difference between a data lake vs data warehouse in terms of data retention?

A

Retains all data vs retains only data for which there is an identified use

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20
Q

What is the difference between a data lake vs data warehouse in terms of data type?

A

Raw, unstructured data vs processed, structured data

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21
Q

What is the difference between a data lake vs data warehouse in terms of flexibility?

A

Flexible and easy to change vs inflexible and difficult to change

22
Q

What is the difference between a data lake vs data warehouse in terms of user access?

A

Can be used by all users vs used for specific business users for pre-determined purposes

23
Q

What is the difference between a data lake vs data warehouse in terms of security?

A

Data may be less secure vs data is easier to secure

24
Q

What might the 4 benefits from a capital project be?

A
  1. Direct cash flow (e.g. increased sales)
  2. Incremental effects on others (e.g. sales of other products, better technical skills overall)
  3. Residual values - might sell equipment at the end
  4. Non financial benefits (customer satisfaction, staff morale etc)
25
Q

What is payback period?

A

The time required for the cash inflows from a capital investment project to equal the cash outflows

26
Q

What are the 4 benefits of using payback period to appraise a project?

A
  1. Simple to calculate
  2. Easy to understand
  3. Good initial screening tool
  4. Allows for risk in timing of cash flows
27
Q

What are the 4 drawbacks of using payback period to appraise a project?

A
  1. Ignores time value of money
  2. Considers only cash flows up to payback date
  3. No clear decision rule
  4. May lead to short termist decision making
28
Q

What is the equation for the accounting rate of return?

A

Average annual profit / Average investment

Where AAP = (total cash in - depreciation)/length of project
and
AI = (Investment + scrap value) / 2

29
Q

What are the 4 benefits of using accounting rate of return to appraise a project?

A
  1. Simple to calculate
  2. Familiar % measure
  3. Looks at entire project
  4. Reflects the way external investors view
30
Q

What are the 3 drawbacks of using accounting rate of return to appraise a project?

A
  1. Ignores time value of money
  2. Based on profits not cash flow - scope for accounting policies
  3. Doesn’t consider length (relative %)
31
Q

What are the 3 reasons that the time value of money means that £1 today is worth more than £1 in the future?

A
  1. Lose out on interest
  2. Lose purchasing power as inflation increases prices
  3. Incur risk that cash may not be received
32
Q

What is the equation for net present value?

A

Sum of present values of all cash inflows and outflows

33
Q

What is the decision rule for investment when using NPV?

A

Undertake project if NPV > 0

34
Q

What are the 4 benefits of using NPV to appraise a project?

A
  1. Allows for time value of money
  2. Shows change in shareholder wealth
  3. Can allow for risk
  4. Looks at entire project
35
Q

What are the 4 drawbacks of using NPV to appraise a project?

A
  1. Requires cost of capital to be estimated
  2. Calculations can be time consuming
  3. Not easily understood by managers
  4. Does not consider project size
36
Q

What is the discounted payback period?

A

The calculation that identifies the point in time when the NPV of cash inflows / outflows equal zero

37
Q

What is the internal rate of return of a project?

A

The discount factor which gives a zero NPV - the actual % return that a project generates

38
Q

What are the 4 benefits of using IRR to appraise a project?

A
  1. Allows for time value of money
  2. Does not require cost of capital to be known
  3. % measure familiar
  4. Looks at entire project
39
Q

What are the 4 drawbacks of using IRR to appraise a project?

A
  1. Ignores the size of the project
  2. Cannot be used to compare mutually exclusive projects
  3. May result in multiple IRRs when there are unconventional cash flows (changing directions)
  4. It is assumed that any surplus cash flows that are generated are reinvested at the projects IRR
40
Q

What is the modified IRR?

A

Finding the compound rate that would equate the time zero value to the terminal value of all future cash flows

41
Q

What is the relationship between nominal, real and inflation rates?

A

(1 + nominal rate) = (1 + real) x (1 + inflation)

42
Q

If given un-inflated, real, current values, what cost of capital do you use to find the NPV?

A

Real cost of capital

43
Q

If using inflated, money cash flows, what cost of capital do you used to find the NPV?

A

Nominal cost of capital

44
Q

What are the 2 possible tax impacts of a capital project?

A
  1. Tax saving/increase due to loss/profit made by project

2. Capital allowances on the purchase of capital equipment

45
Q

How do working capital requirements effect project NPV calculations?

A

Cash outflow to increase working capital investment, cash inflow at end of project

46
Q

What is the best calculation to use to compare 2 mutually exclusive projects?

A

NPV (which adds more value to shareholders?)

47
Q

What is the equation for Equivalent Annual Cost (EAC)?

A

NPV / Annuity Factor for the Project life

48
Q

What is the reason for using EAC?

A

Comparing two projects where the benefits are unequal, so converting this to an equivalent figure that would occur every year on an ongoing basis

49
Q

What is capital rationing?

A

When an organisation does not have sufficient funds to undertake all positive NPV projects at one point in time

50
Q

What do we use to rank divisible projects when undergoing capital rationing?

A

Profitability Index = NPV / Initial Investment

51
Q

What do we use to choose indivisible projects when undergoing capital rationing?

A

The combination of all projects, under the rationed level, that generates the largest total NPV

Management Case Study (36 decks)

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