Unit 6 Flashcards
What is Investment appraisal
Quantative techniques to access the profitability or desirability of a project
E.g. should we build a new factory
You will be given
A large negative number in the first year
A series of small positive numbers
What is Payback period
Length of time for net cash inflows to be larger than the original investment
When do you get your money back?
With all investment appraisal calculations, add a third column called accumulated cash flow
All cash flows up to that year added together
Payback is when the accumulated cash flow reaches zero
Quick and easy to understand
We get our money back after 2 years and 6 months
Ignores later cashflows after the payback (which may be larger)
Could encourage short term thinking
What is Average rate of return (ARR)
Mesures the profitability of a project as a percentage of the initial capital cost
Profit = Inflows - Outflows
ARR (%)
Average annual profit / Initial capital cost x 100
They use all cashflows
They Igore the timing of the larger cash flows
They can compare to returns on other investments
What are the 4 steps to ARR
Calculate the total profit
Divide by years
Divide by original cost
x100
Average rate of return (ARR) - example 1
ARR(%) = Average annual profit / Initial capital cost x 100
Total profit = 300 over 4 years
Average annual profit = 300/4 = 75 per year
ARR (%) = 75/500 x100 = 15%
What is Net present value
$100 is worth more than in the future
Inflation reduces the value of money over time
The further into the future, the more inflation erodes it
For investment appraisal we should allow for this
Discounting = reducing the value of future cash flows using a discount factor %
The further into the future, the more is discounted
Takes account of the time value of money
But assumptions have to be made about the discount rate to use
NPV is calculated as the sum of the discounted cashflows
To calculate discounted cash flow, multiply annual net cash flows by the discount factor in same row
What is the difference between management and leadership?
A Manager
- a person who organizes the resources within an organization in order to achieve the objectives of the organisation
- getting things done
A Leader
- a person who has a vision for the future of the organization and inspires others to follow them
- a person may act as both a leader and a manager
What do managers do? - Fayol’s 1916 book
- planning
- organizing
- commanding
- coordinating
- controlling
what do each of the roles of a manager intail? - Fayol’s Theory 1916 book
- planning
- setting objectives - organizing
- ensuring resources are in the right place - commanding
- assigning tasks to employees and making sure they do this - coordinating
- making sure everyone is working towards the same goal - controlling
- measuring performance and making necessary changes
What is scientific thinking (HL only)
Scientific management:
- Data is collected and analyzed and a decision is made based on this.
- Logical, rational and data-based
- However, data may be biased, costly or unavailable
What is intuitive thinking
Intuitive thinking:
- Decisions are based on intuition and gut-feeling
Good when:
- Data is not available or potentially biased
- When data may not work (e.g. assessing character or the result of a new HR policy)
What are the 5 Leadership Styles
Autocratic
Paternalistic
Democratic
Laissez-faire
Situational
Explain Autocratic leadership style
Leaders take decisions on their own without input from others, and then announce the decision to employees
Centralised decision making
Suitable when:
- Quick decisions need to be made
When employees are unskilled
Impact:
- Employees become dependent on leaders and dont make decisions
- Low morale and high staff turnover
E.g armed forces and emergency services
Explain Paternalistic leadership style
Similar to autocratic but leaders listen to employees and make decisions in their best interest, but still make the final decisions
Pater = Father
Impact:
- Higher morale, higher loyalty, higher motivation
- Still no participation in decision making
Explain Democratic leadership style
- Employees participate in decision making and decisions are made based on what the majority decides
- Could be voting or through informal discussions
Impact: - Higher morale, empowered, committed to the decision
- But slow decision-making, leaders and employees need certain skills
E.g start-ups