Q3 Flashcards
What is the advantages & disadvantages of Payback?
Payback is a method that shows how rapidly a project returns the initial investment back to the organisation.
Advantages:
- Easy to calculate
- Easy to understand
- Quick decisions to be made on go, no-go rules
Disadvantages:
- Doesn’t consider time value of money
- Payback method does not give a rate of return
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What are the advantages and disadvantages of Discounted cash-flow?
DCF compares the the value of a unit of currency today to the value of that same unit in the future, taking inflation and returns into account.
Advantages:
- Take into account the time value of money
- Takes inflation and returns into account
Disadvantages:
- No certainty with the calculations using the discount figure
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What are the advantages and disadvantages of Internal Rate of Return?
Internal rate of return is defined as the discount rate where the NPV of cash flows are equal to zero. An internal rate of return offers a way to quantify the rate of return provided by the investment.
Advantages:
- Widely accepted in the project and financial community
- Considers time value of money
- Can provide excellent guidance on project’s value and risk
Disadvantages:
- Multiple or no rates of return
- Changes in discount rates
Explain the term exchange rate?
Exchange rate is the price of a nations currency in terms of another currency. It is the rate at which one country’s currency is traded for that of another.
There will be 2 exchange rates between pairs of currencies; a selling rate and a buying rate.
What is meant by a fixed and floating exchange rate including their role in managing the volatility of currencies?
Fixed rates (pegged exchange rates) In this system the currency's value is matched to some sort of anchor currency or even a commodity. The advantages of this are that the fixed rate method can provide certainty to exporters and importers as a guard and also it is an assurance against speculation.
Eg. Dollarisation is an extreme example of a fixed rate: a nation officially adopts another nations currency as it’s own.
Floating (flexible exchange rates)
In this system currency’s are allowed fluctuate freely according to demand and supply, interest rates and inflation rates. Government intervention will still occur to achieve a government target rate. This is considered to be a managed or dirty float.
Reasons for exchange rate volatility?
Supply and demand; (interest rates, inflation, policies, speculation)
Purchasing power parity
The Fisher Effect
Balance of Payments; (international trade)
5 risks that is present when funding investment in long term project?
Fights Typical Risks
Credit Risk;
Market Risk; (currency risk, interest rate, supply/demand)
Portfolio Concentration; (too much focus on one area)
Liquidity Risk; (both client and contractor)
Operational Risk; (systems, people, operations)
Business Event Risk; (STEEPLE)
Explain the term project finance?
Project finance is the funding package put together to enable large-scale, long term assets to be developed, built or installed which will, in operation, pay back the money invested in creating them from their own activities. Uses of project finance include the following;
- Energy infrastructure
- Pipelines
- Mining projects
- Roads
- Factories
- Hospital
Evaluate the key long-term sources of finance that may be available to a large public limited company (plc)?
Debt vs Equity
Equity Options:
- Ordinary and preference shares
- Venture capital
- Future retained profits
Debt Options:
- Bank loans
- Leasing
- Hire Purchase
- Sale and leaseback agreements
- Bonds
- Grants
- Debentures
Describe 3 services provided by the banking sector?
Trade Finance Guarantees Bills of Exchange Documentary letters of credit International bank accounts Currency exchange and trading Client introductions Business advice Investment Advice
Outline the role played by the banking sector in international trade?
Banks are vital facilitators of international trade; besides providing liquidity they guarantee payment for around a fifth of world trade, in particular when the contract enforcement of the company is weak.
Banks can;
- lend money through various loans
- enable payments internationally through electronic transfer
- provide credit references
- assist with market intelligence
- assist parties reach agreed exchange values
Analyse 5 factors that could impact exchange rates?
Interest rates Inflation Government Policy Speculation Purchasing Power Parity The Fischer Effect Balance Of Payments
Assess three main reasons for the volatility of exchange rates?
Supply and Demand Level of interest rates Employment Outlook Economic Growth Expectations The Balance Of Trade Central Government Intervention
Compare the use of spot and forward exchange rates in the management of currencies by organisations in a supply chain?
A spot rate is the exchange rate that is being offered at the current time for an immediate transaction. The spot foreign exchange (forex) rate differs from the forward rate, in that it prices the value of currencies compared to foreign currencies today, rather than some time in the future. The spot rate in forex currency trading is the rate that most traders use when trading with an online foreign exchange broker.
A currency future or forward contract is legally binding contract that obligates the two parties involved to trade a particular amount of a currency pair at a predetermined price at some point in the future. Assuming that the seller dies not prematurely close out the position, they can either choose to own the currency at the time the future is written, or may speculate that the currency will be cheaper in the spot market some time before settlement date.
Analyse the possible methods for managing commodity price volatility in the supply chains?
Commodities are unbranded and undifferentiated products the same in nature no matter the source nor who supplies them. Traditionally there are two types of commodities;
Hard: Natural resources that are mined or extracted (Oil, Metals)
Soft: Natural resources that are grown (Fruit, Grain)
- Negotiating with supply chain partners
- Improving purchasing operations
- Pooling purchases to get discounts
- Backward integration
- Exchange rate management
- Forward buying
- Futures contracts