(PAPER 3) 3.3.2 investment appraisal

Question 1

how would you calculate payback

Answer 1

step 1: inflows-outflows= net cash flows/ net returns
step 2: deduct year 1 net cash flow from initial costs
step 3: keep going until the amount left to pay is less than the amount coming in the following year- this gives you the years
step 4: use the formula to find the months- amount left to pay / amount coming in the following year x12
(look on one note for example)

Question 2

when you calculate pay back, how would you interpret the figures? and what would be a best case scenario?

Answer 2

lower payback time best- less risky

Question 3

how would you calculate average rate of return

Answer 3

inflows- outflows= net cash flows or net returns 
add up all net cash flows
- initial costs 
/ by no. of years
/ by initial costs
x 100
(look on one note for example)

Question 4

when you calculate average rate of return, how would you interpret the figures? and what would be a best case scenario?

Answer 4

the higher the % the better. the business is making a larger % profit relative to the investment costs

Question 5

how would you calculate discounted cash flow (net present value)

Answer 5

inflows- outflows= net cash flows or net returns
x each cash flow by the relevant discount factor
add up
deduct the initial costs
(look on one note for example)

Question 6

when calculating discounted cash flow how would you interpret the figures? and what would be a best case scenario?

Answer 6

the higher the £ the better. the business is making more actual profit £ relative to the investment costs

Question 7

why is the amount of the discount factor important when calculating NVP? e.g. a business setting a 3% or 10% discount factor

Answer 7

the higher the discount factor the larger the risk ( the business may choose a project with a lower discount factor as it wishes to take less risk

Question 8

benefits and drawbacks of using investment appraisal as a decision making technique

Answer 8

+ provides quantitative data for the business to make a more informed decision
+ satisfy shareholders that investment is worthwhile
- figures are all estimated
- ignores qualitative factors that may be important when making a decision

Question 9

3 qualitative factors that a business should also consider when making an investment decision

Answer 9

1. human resources ( will it negatively effect employees)
2. risk
3. corporate objectives/image

Question 10

why do businesses invest

Answer 10

1. generate more profit
2. benefit from economies of scale
3. invest in capital equipment- increases productivity
4. increases brand recognition/reputation