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business > Topic 7- > Flashcards

Topic 7- Flashcards

1
Q

what does investment mean ?

A

improving or expanding the business in some way

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2
Q

what project needs appraising before it can be accepted ?

A

individual projects

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3
Q

what are the 3 types of investment appraisal projects ?

A
  • paybacks
  • average rate of return
  • net profit value
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4
Q

what is investment appraisal ?

A

3 calculations to test if an investment project is worth it

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5
Q

what are payback period ?

A

how long it takes to get the money back ?

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6
Q

what is average rate of return ?

A

on average each year, what % return are we getting on this investment

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7
Q

what is net profit value ?

A

looking at all the future earning from the project and compare it to the initial costs

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8
Q

are future cash flows as valuable the same cash flows today ?

A

no
- future cash flows are discounted

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9
Q

what are 3 benefits of net profit value ?

A
  • considers all future cash flow
  • builds risk into the process
  • produces a ‘yes/no’ decision
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10
Q

what are the 3 drawbacks to net profit value ?

A
  • 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
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11
Q

why do you want to choose a low discount rate ?

A

to persuade your managers

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12
Q

what are the 3 benefits to paybacks ?

A
  • 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
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13
Q

what are 4 drawbacks to paybacks ?

A
  • 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
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14
Q

what is total net return ?

A

each year, calculate the net return then add them all up for every year

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15
Q

what does average rate of return do ?

A
  • 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
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16
Q

what are the 3 benefits of average rate of return ?

A
  • 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
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17
Q

what are 3 drawbacks to average rate of return ?

A
  • 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
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18
Q

what are the 3 factors influencing investment decisions ?

A
  • rate of interest
  • the level of profit
  • alternative investment
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19
Q

what are the 4 non-financial factors ?

A
  • corporate image
  • corporate aims and objectives
  • environment and ethical issues
  • industrial relations
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20
Q

why does rate of interest influence investments ?

A
  • 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
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21
Q

why does level of profit influence investments

A
  • as managers may insist that any investment projects must match or potentially exceed the business overall target for profits
22
Q

why does alternative investments influence investments ?

A
  • can be very different investments
  • may select projects that perform best
23
Q

why can corporate image influence investments ?

A
  • may reject a project even if more profitable if might reflect badly on the business
24
Q

why can corporate aims and objectives influence investments ?

A
  • most only take on an investment if it will assist in the achievement of the corporate objectives
25
Q

why can environmental and ethical issues influence investments ?

A
  • can be a core part of some business philosophy to be moral and others may not
26
Q

why can industrial relations influence investments ?

A
  • profitable investments may be turned down if they result in substantial loss of jobs
27
Q

what is a mission statement ?

A

sets out business overall purpose to direct and inspire the entire organisations
- purpose of now

28
Q

what is a corporate objective ?

A

medium to long term goals established to coordinate the business

28
Q

what is a vison statement ?

A

sets out business aspirations for the future

28
Q

what are the 5 influences on the mission ?

A
  • values of founders
  • values of employees
  • industry
  • society
  • ownership
28
Q

what is strategic decision ?

A

judgements made by senior managers that are long term which involve major commitment and resources and are difficult to reverse

29
Q

what are the 7 other business objectives ?

A
  • market position
  • innovation
  • financial resources
  • physical resources
  • human resources
  • productivity
  • social responsibility
30
Q

why do the teams need to meet the corporate objective ?

A

to meet the mission statement

31
Q

what do the strategies help achieve ?

A

the objectives which have been set by the mission statement ?

32
Q

what are shareholder returns ?

A

financial benefits of owning shares ( appreciating share price and dividends paid)

33
Q

what is short-termism ?

A

pressure to deliver quick results to the potential detriment of the longer term development of a company

34
Q

what is culture ?

A

it encompass values. attitudes and beliefs of those who work for a business

35
Q

what is the decision most likely to be if based on short termism ?

A

to focus on cutting that investments in products, processes and staff

36
Q

what is a strategy ?

A

long term plan to achieve the businesses vision through attaining its corporate objectives ?

37
Q

what is a tactic ?

A

a short-term decision which usually involves relatively few resources that are made to implement a strategy

38
Q

what are the areas involved with a strategy ?

A
  • long term to achieve vision
  • major commitment of resources
  • greater uncertainty
  • high level finance
  • difficult to reverse
  • done by senior management
39
Q

what areas are involved in tactics ?

A
  • short term
  • fewer resources
  • less uncertainty
  • easier to reverse
  • about implementing a strategy
  • junior management
40
Q

what is a functional decision ?

A

judgement taken by managers responsible for one aspect of a business activities
eg) HR

41
Q

what are the 4 external influences on corporate objectives ?

A
  • state of the economy
  • global prices
  • technological influences
  • migration
42
Q

what are the 3 internal influences of the economy ?

A
  • poor performance
  • new leader
  • business culture
43
Q

what are the 2 other influences ?

A
  • pressures of short termism
  • the business ownership
44
Q

what is S.W.O.T analysis ?

A

the management technique used to identify a business internal strengths and weaknesses and the external opportunities and threats which its exposed

45
Q

what are 5 benefits of S.W.O.T analysis ?

A
  • 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
46
Q

what are 5 limitations to S.W.O.T analysis ?

A
  • 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
47
Q

what are the 2 key financial reports that asses the financial performance of a business ?

A
  • balance sheets
  • income statements
48
Q

what is a balance sheet ?

A

a formal financial document that summarises the net worth of a business at a given point in time
- balances net assets with total equity

49
Q

what are income statements ?

A

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

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