Topic 6 - Investment Appraisal Flashcards

1
Q

Capital investment

A

The investment of capital in non-current assets to help businesses generate profits

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2
Q

Advantages of payback

A

Simple to understand and calculate

Focus on quick recovery of cash, liquidity and risk minimisation

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3
Q

Disadvantages of payback

A

Does not take into account the time value of money
Based on forecasted cash flows so will only be as accurate as the forecast
Ignores cash flow accuring after payback

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4
Q

Net Present Value

A

The sum of all the present values of the future cash flow for a project

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5
Q

Advantages of NPV

A

Uses all the cash flows generated
Gives a greater weighting to the earlier cash which is less risky then the future cash flow
Allows projects with different lengths and different patterns of cash flow to be compare on a common basis

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6
Q

Disadvantages of NPV

A

More difficult to calculate and more difficult to understand
Assumes a constant cost of capital over the project life
Like all capital investment techniques it is based on forecast cash flows
Ignores qualitative, ie, non-financial factors

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7
Q

Payback

A

The time it takes form an investment to return

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