Topic 7- Flashcards
what does investment mean ?
improving or expanding the business in some way
what project needs appraising before it can be accepted ?
individual projects
what are the 3 types of investment appraisal projects ?
- paybacks
- average rate of return
- net profit value
what is investment appraisal ?
3 calculations to test if an investment project is worth it
what are payback period ?
how long it takes to get the money back ?
what is average rate of return ?
on average each year, what % return are we getting on this investment
what is net profit value ?
looking at all the future earning from the project and compare it to the initial costs
are future cash flows as valuable the same cash flows today ?
no
- future cash flows are discounted
what are 3 benefits of net profit value ?
- considers all future cash flow
- builds risk into the process
- produces a ‘yes/no’ decision
what are the 3 drawbacks to net profit value ?
- most complicated compared to APR and paybacks
- choosing the discount rate is hard, particularly for long projects
- results can be influenced/ manipulated using the discount rate
why do you want to choose a low discount rate ?
to persuade your managers
what are the 3 benefits to paybacks ?
- simple and easy to calculate and easy to understand the ethics
- emphasis speed of return which is good for markets which change rapidly
- straight forward to compare competing projects
what are 4 drawbacks to paybacks ?
- it ignores cash flow once it has been received so it doesn’t look beyond
- takes no account of the ‘time value of the money’
- doesn’t take into consideration the potential changing variables
- may encourage short-term thinking as only go for the ones that payback quicker
what is total net return ?
each year, calculate the net return then add them all up for every year
what does average rate of return do ?
- allows a manager to estimate the return from a project per year
- can be compared to other uses of the money and previous investment projects
what are the 3 benefits of average rate of return ?
- simple to understand and calculate
- easy to compare to APR with other key target rates of return to help make a decision
- uses all the returns generated by a project unlike paybacks which ignores everything after a project pays of its fees
what are 3 drawbacks to average rate of return ?
- estimate so may not be accurate as a forecast
- ignores the timings it takes to return so best years are actually a few years down the line
- doesn’t adjust for the time-value of money
what are the 3 factors influencing investment decisions ?
- rate of interest
- the level of profit
- alternative investment
what are the 4 non-financial factors ?
- corporate image
- corporate aims and objectives
- environment and ethical issues
- industrial relations
why does rate of interest influence investments ?
- interest rates should produce a positive NPV
- managers of a business will seek a return that will either be greater than the current and forecast interest rates if APR or NPV is used
why does level of profit influence investments
- as managers may insist that any investment projects must match or potentially exceed the business overall target for profits
why does alternative investments influence investments ?
- can be very different investments
- may select projects that perform best
why can corporate image influence investments ?
- may reject a project even if more profitable if might reflect badly on the business
why can corporate aims and objectives influence investments ?
- most only take on an investment if it will assist in the achievement of the corporate objectives
why can environmental and ethical issues influence investments ?
- can be a core part of some business philosophy to be moral and others may not
why can industrial relations influence investments ?
- profitable investments may be turned down if they result in substantial loss of jobs
what is a mission statement ?
sets out business overall purpose to direct and inspire the entire organisations
- purpose of now
what is a corporate objective ?
medium to long term goals established to coordinate the business
what is a vison statement ?
sets out business aspirations for the future
what are the 5 influences on the mission ?
- values of founders
- values of employees
- industry
- society
- ownership
what is strategic decision ?
judgements made by senior managers that are long term which involve major commitment and resources and are difficult to reverse
what are the 7 other business objectives ?
- market position
- innovation
- financial resources
- physical resources
- human resources
- productivity
- social responsibility
why do the teams need to meet the corporate objective ?
to meet the mission statement
what do the strategies help achieve ?
the objectives which have been set by the mission statement ?
what are shareholder returns ?
financial benefits of owning shares ( appreciating share price and dividends paid)
what is short-termism ?
pressure to deliver quick results to the potential detriment of the longer term development of a company
what is culture ?
it encompass values. attitudes and beliefs of those who work for a business
what is the decision most likely to be if based on short termism ?
to focus on cutting that investments in products, processes and staff
what is a strategy ?
long term plan to achieve the businesses vision through attaining its corporate objectives ?
what is a tactic ?
a short-term decision which usually involves relatively few resources that are made to implement a strategy
what are the areas involved with a strategy ?
- long term to achieve vision
- major commitment of resources
- greater uncertainty
- high level finance
- difficult to reverse
- done by senior management
what areas are involved in tactics ?
- short term
- fewer resources
- less uncertainty
- easier to reverse
- about implementing a strategy
- junior management
what is a functional decision ?
judgement taken by managers responsible for one aspect of a business activities
eg) HR
what are the 4 external influences on corporate objectives ?
- state of the economy
- global prices
- technological influences
- migration
what are the 3 internal influences of the economy ?
- poor performance
- new leader
- business culture
what are the 2 other influences ?
- pressures of short termism
- the business ownership
what is S.W.O.T analysis ?
the management technique used to identify a business internal strengths and weaknesses and the external opportunities and threats which its exposed
what are 5 benefits of S.W.O.T analysis ?
- see areas that need to improve
- helps set objectives and strategies
- facilitate development and logical plans
- helps to asses the degree of risk
- low cost/ straight forward
what are 5 limitations to S.W.O.T analysis ?
- isn’t looking at the future
- can be subjective as on how you interpret it
- grey or 2 sided areas
- need to judge relative importance
- only as good as the data it
what are the 2 key financial reports that asses the financial performance of a business ?
- balance sheets
- income statements
what is a balance sheet ?
a formal financial document that summarises the net worth of a business at a given point in time
- balances net assets with total equity
what are income statements ?
a formal financial document that summarises the business trading activities and expenses - to show whether the business has made a profit or not or a loss over a specified period of time
