Unit 7

Question 1

Define mission statement

Answer 1

sets out a business’s overall purpose to direct and stimulate the entire organisation.

Question 2

Define Aims

Answer 2

Generalised statements of where the business is heading, from which specific objectives can be set.

Question 3

What are four influences on the mission statement

Answer 3

Purpose — the reason why the business exists. This could be what the founders aimed to achieve when they started the business.

Values — what the company believes in. This is often linked to business ethics and how the business treats its various stakeholders such as employees, customers and suppliers.

Standards and behaviour — how employees are expected to behave. This is linked to the culture of the business. It is set by the senior management regarding what they require from employees in terms of working hours, dress code and interaction with other workers.

Strategy — the mediumto long-term plans the business needs in order to achieve its objectives.

Question 4

Define Objectives

Answer 4

The goals a business sets that need to be achieved to keep the business on track to achieve its aims.

Question 5

Define Objectives

Answer 5

The goals a business sets that need to be achieved to keep the business on track to achieve its aims.

Question 6

Internal influences on coroporate objectives and decisions

3 points

Answer 6

The ambitions of the chief executive — Linked to the leadership style of the chief executive. Successful leaders will often set challenging objectives and inspire their employees to achieve them.

The financial position of the business — the profitability and cash flow position of a business are important factors when deciding upon objectives. For example, a profitable business will be in a strong position to afford the investment required in order to achieve ambitious objectives.

Human resources in terms of the quality and ability of senior staff — a business will need highly skilled and experienced managers in order to successfully carry out the strategy required to achieve objectives.

Question 7

External influences on coroporate objectives and decisions

6 points

Answer 7

Competition — If a business is competing against strong rivals, it may need to set less ambitious objectives.

Changes in consumer tastes — if the business’s product/service loses popularity, the business will need to set different objectives, such as developing new products.

The economic environment — if the economy becomes stronger, consumers will be more confident and increase their spending.=more ambitious objectives.

Changes in legislation — this could make achieving objectives more difficult. For example, if the government raised the minimum wage, the increase in costs might make it more difficult for a business to achieve profit objectives.

Pressure from shareholders — does the business adopt a ‘short-termist’ approach? In this case the business may have to set an objective of maximising its profits

Type of business ownership — private or public limited company, non-profit organisation, public or private sector? Public limited companies will set objectives linked to ensuring that shareholders are satisfied, whereas a non-profit organisation may set objectives linked to social values.

Question 8

Name a strategy and tactics a businesss might implement to achieve its objective of increasing market share

Answer 8

a business may decide upon a strategy of targeting a new market segment. The tactical decisions will be short term, for example using an advertising campaign aimed at this market segment.

Question 9

List the logic chain
in order of:
Corporate objectives
Aims/mission
Tactics/Plans
Corporate strategy

Answer 9

Aims/mission
Corporate objectives
Corporate strategy
Tactics/Plans

Question 10

Define Strategy

Answer 10

The medium to long-term plan that the business needs in order to achieve its objectives.

Question 11

Define tactics

Answer 11

Responses to short-term opportunities or threats.

Question 12

what does SWOT stand for
and which ones are internal and external?

Answer 12

S = Strengths;
W = Weaknesses;
O = Opportunities;
T = Threats.

Strengths and weaknesses are internal.
Opportunities and threats are external.

Question 13

What is the use of SWOT analysis and how often must it be conducted and why

Answer 13

It is a decision-making tool used by senior managers to gain an insight into the current and potential position of a business. It gives them the evidence to help decide future strategy.

a business should regularly conduct SWOT analyses as a basis for making strategic decisions.
This requires regular market research to assess the external environment as well as constant reviews of internal performance.

Question 14

Who would be interested in a business’ financial performance

Answer 14

Stakeholders including:
Shareholders, employees and suppliers.

Question 15

Define Balance sheet and income statement

Answer 15

Shows an organisation’s assets and liabilities at a precise point in time. The balance sheet shows what the business owns and what it owes at a certain point in time.

Question 16

What is the different between current and non current assets

provide 3 examples for each

Answer 16

Current = lasts less than 1yr
non current = lasts more than 1yr
eg: current = cash, inventory and recievables
non current = propert, vehicles and machinery

Question 17

How ia the liquidity of a business calculated
what is this figure known as?

Answer 17

working capital:
current assests - current liabilities

Question 18

What are Net assets

Answer 18

Total assets - Total liabilities

Question 19

What are net assets financed by?

2 points

Answer 19

Share capital - funds raised by selling shares
resevers - reinvested/ reatained profit

Question 20

What is share capital + reserves

Answer 20

Total equity

Question 21

What is the structure of a balance sheet

Answer 21

Non-current assets
current assets
current liabilities
Net current assets
non-current liabilities
Net assets
Equity
Total equity

Question 22

Define income statement

Answer 22

Records the amount of profit (or loss) that a business has made over a previous trading period.

Question 23

Describe the stucture of the income statement

Answer 23

Gross profit — calculated by subtracting cost of sales from revenue.

Operating profit — calculated by subtracting overheads from gross profit.

Profit before tax — calculated by subtracting financing costs from operating profit.

Profit after tax — calculated by subtracting tax from profit before tax.

Question 24

how are negatives represented in an income statement

Answer 24

(in brackets)

Question 25

Define dividens

Answer 25

Represent the share of the profit after tax given to shareholders.

Question 26

How can profit after tax(earnings) be distributed and who decides how they are distributed

Answer 26

As Retained profit or dividens
the directors of the business

Question 27

define overheads

Answer 27

ongoing business expenses not directly attributed to creating a product or service

Question 28

What are the four types of ratios

Answer 28

Profitability ratios - Measure the relationship between gross/net profit and revenue, assets and capital employed.

Liquidity ratios - Investigate the short-term financial stability of a firm by examining whether there are sufficient short-term assets to meet the short-term liabilities (debts).

Gearing - Examines the extent to which the business is dependent upon borrowed money; it is concerned with the long-term financial position of the company.

Efficiency ratios - Measure how efficiently an organisation uses its resources and controls credit.

Question 29

What does ROCE need to be compared with?

Answer 29

Previous years
competitors
interest rates offered by banks

Question 30

What is the ideal current ratio

Answer 30

1.5-2.0 : 1.0

Question 31

What is the ideal gearing

Answer 31

<50%

Question 32

Name all the ratios in financial ratio analysos

6 points

Answer 32

ROCE
Current
Gearing
Inventory turnover
Recievables
payables

Question 33

Four limitations of financial ratios

Answer 33

They do not consider qualitative info

Accounts are historical and therefore cannot be used as a iguide for future

The business may ‘window dree’ its accounts to make the financial performance seem better

They do not give a complete picture of the overall performance of the business

Question 34

five measures of marketing performance

Answer 34

Market share - most commonly used measure of marketing performance as it reveals the sales of the business’s products in comparison with those of its rivals.

Brand image - enables the business to retain existing customers as well as attract new ones.

Customer service - needs to ensure that it records all customer complaints and takes steps to reduce them.

Effectiveness of marketing campaigns - Market research should be carried out before, during and after a marketing campaign in order to measure if it has achieved its objectives.

New product sales as a percentage of all product sales - New products is crucial for long-term success, particularly in fast-changing markets characterised by products with short product life cycles.

Question 35

five measures of marketing performance

Answer 35

Market share - most commonly used measure of marketing performance as it reveals the sales of the business’s products in comparison with those of its rivals.

Brand image - enables the business to retain existing customers as well as attract new ones.

Customer service - needs to ensure that it records all customer complaints and takes steps to reduce them.

Effectiveness of marketing campaigns - Market research should be carried out before, during and after a marketing campaign in order to measure if it has achieved its objectives.

New product sales as a percentage of all product sales - New products is crucial for long-term success, particularly in fast-changing markets characterised by products with short product life cycles.

Question 36

How might HR performance be measure for a hard human resource approach

Answer 36

labour turnover and retention

labour productivity

employee costs as percentage of turnover

labour cost per unit

Question 37

How might HR performance be measure for a soft human resource approach

Answer 37

annual ratings of staff satisfaction

amount spent on training per employees

statistics relating to the composition of the workforce regarding gender, ethnic background and disabled employees

Question 38

four ways of measuring operational performance

Answer 38

Capacity utilisation
quality
productivity
speed of response and flexibility

Question 39

Define core competences

Answer 39

Are the unique abilities that a business possesses that provide it with competitive advantage.

Question 40

What does a short-termist approach lead too

3 points

Answer 40

Insufficient spending on R&D

Greater empthasis on dividens rather than retained profit

Achievinf growth through takeovers instead of organic growth

Question 41

Why might an Ltd be adopt a more long term approach than a PLC

Answer 41

As the majority of their shares are owned by private individuals rather than by pension funds. Many Ltd’s are small to medium-sized and family-owned firms. This means that they are under less pressure to deliver immediate improvements in results.

Question 42

What does a long term approach lead to?

Answer 42

Higher retained profits lead to greater investment into:
R&D
Staff training
New machinery and technology

Question 43

Describe the Kaplan and Norton’s balanced scorecard

Answer 43

Measures business performance in terms of four perspectives:
Financial
Customer
Business process
Learning and growth.

Question 44

Describe what Financial perspective of the Kaplan and Norton balanced scorecard consists of.

4 points

Answer 44

Business performance in terms of: Profit
Growth
Return on capital
Liquidity.

Question 45

Describe what customer perspective of the Kaplan and Norton balanced scorecard consists of.

what is usually used to measure this

3 pointa and a way of measuring (qaulitative)

Answer 45

measures performance in terms of: customer satisfaction
Market share
Rate of repeat purchase

customer satisfaction surveys are commonly used.

Question 46

Describe what the business process perspective of the Kaplan and Norton balanced scorecard consists of.

3 points

Answer 46

focuses on the operational performance. Measures include:
Productivity
Quality
Speed of response.

Question 47

Describe what learining and growth perspective of the Kaplan and Norton balanced scorecard consists of.

Answer 47

concerned primarily with employee performance and how it contributes to the growth of the business.Data on the following is used:
The amount spent on training
The number of new ideas generated employees.

Question 48

Advantages of K&Ns balances scorecard

3 points

Answer 48

It provides a wider view of business performance

Encourages the business to find measures that look to the present and future

Identifies factors that can be measured in terms of success.

Question 49

disadvantages of K&Ns balances scorecard

3 points

Answer 49

employees may become too focused on simply achieving targets

If the targets set are not SMART employees will become demotivated

Drawing up the scorecard takes time and can be too rigid.

Question 50

Define Elkington’s triple bottom line

Answer 50

Aims to encourage businesses to account for the social cost of their activities. The triple bottom line consists of 3 Ps:
Profit
People
Planet

Question 51

Benefits of Elkington’s triple bottom line

Answer 51

The businesses become more accountable to all their stakeholders
and they pay more attention to social and environmental factors.

Question 52

Drawbacks of Elkington’s triple bottom line

Answer 52

It is very difficult to quantify social and environmental costs and benefits.

Question 53

Define Political and legal environment

Answer 53

Concerned with legislation passed by government that is usually a part of government policy. Businesses will be affected by government legislation.

Question 54

Define Political and legal environment

Answer 54

Concerned with legislation passed by government that is usually a part of government policy. Businesses will be affected by government legislation.

Question 55

What is competition law designed to ensure?

Answer 55

Dominant businesses do not work together to restrict supply of products and charge artificially high prices.

A dominant business abusing its power by treating suppliers unfairly.

Monoploy businesses

Question 56

What does employment law intended to prevent and what does it cover

Answer 56

The exploitation of employees by businesses.
It covers areas such as:

Pay

Working conditions (hours & health and safety)

Equal opportunities (discrimination)

The right to have trade union representation

Question 57

How might business avoid increased wage bill due to a rise in the living wage legislation

2 points

Answer 57

Offshore operations
invest in machinery

Question 58

What does enviromental legislation aim to do

Answer 58

Minimise the negative impacts of a business activities on the enviroment

encourage businesses to be more accountable for social costs

Air,land and water pollution are protected

Question 59

Why are business happy to comply with enviromental legislation despite extra costs and bureaucracy.

Answer 59

Through measures such as recycling, energy conservation and minimisation of waste, significant cost savings can be made.

A good environmental image of a business enhances its reputation and provides a USP. This may attract consumers and ethical investors.

Question 60

Provide three examples of government policy helping people set up businesses

Answer 60

providing cheap finance through ‘start-up loan’ schemes

Creating ‘enterprise zones’ to attract businesses to locate to regions suffering from high unemployment

Providing advice and training

Question 61

Provide three examples of government policy helping small- medium sized businesses expand

Answer 61

Business Finance Partnership, which provides cheap sources of finance

Tax incentives such as reducing the taxes companies have to pay as a result of employing extra staff
Pickerden, Mike. AQA a-L

Question 62

What is the roles of regulators

Answer 62

In industries that have undergone privatisation (once government owned) eg: water and energy, regulators are appointed by the government and are responsible for ensuring customers are not exploited by dominant private sector firms

Question 63

How do regulators ensure their responsibilies are kept

Answer 63

Price controls — dominant firms operating in a market are allowed to increase prices only by an amount set by the regulator, for instance gas and electricity prices

Regulating the product or service provided — certain minimum standards are set, which all firms in that industry must achieve, for example safety and/or punctuality standards for railway companies. Failure to meet these standards can result in financial penalties

Question 64

Define Infrastructure

Answer 64

Also known as social capital. It includes the road and rail network, access to utilities such as energy, water and broadband, education and medical facilities.

Question 65

Define Infrastructure

Answer 65

Also known as social capital. It includes the road and rail network, access to utilities such as energy, water and broadband, education and medical facilities.

Question 66

How does the government policys help the infastructure contribute to the productivity of domestic businesses

Answer 66

Modern transport
high quality education
effective healthcare

leads to

fewer working hours lost to congestion
better educated workers
fewer working days lost to ill health

all leads to

higher productivity and a more competitive economy

Question 67

how do government policys protect the enviroment

Answer 67

green taxes — related to the amount of pollution created by a business

Subsidies — providing funds to businesses to encourage better environmental behaviour

Laws and regulations — covering practices such as the materials used, manufacturing processes and recycling

Question 68

Define Tariffs

Answer 68

Taxes that are imposed on imports. This results in them becoming more expensive.

Question 69

Defien quotas

Answer 69

Restrictions on the amount of a certain product that can be imported into a country.

Question 70

Defien quotas

Answer 70

Restrictions on the amount of a certain product that can be imported into a country.

Question 71

Why is international trade supported by governments and businesses

Answer 71

Governments like to encourage free trade of imports and exports between countries beacuse it can raise living standards

businesses like it as it enables them to sell their products to foreign and domestic markets

Question 72

how can international trade be restricted by government policies and why may they do this

Answer 72

International trade can be restricted by tariffs and quotas . Governments will often impose tariffs on imported goods to protect their domestic industries.

Question 73

Define economic change

Answer 73

refers to fluctuations in national and international ‘macroeconomic’ variables such as changes in exchange rates, inflation, unemployment and economic growth.

Question 74

Define Gross domestic product (GDP)

Answer 74

The total value of all the goods and services produced by a country in a year. It is a measure of economic growth.

Question 75

Describe the business cycle
and name its stages

Answer 75

Business cycle Measures the regular pattern of ups and downs in GDP over time. It is characterised by four main phases: boom, recession, slump and recovery.

Question 76

Define fiscal policy

Answer 76

Concerned with government tax and spending

Question 77

Define Monetary policy

Answer 77

Involves the Bank of England setting interest rates, which influence the level of spending in the economy.

Question 78

Name the five main forms of taxation

Answer 78

Income tax - income an individual earns. The higher the income, the greater the rate of taxation.

National insurance - Is an additional tax paid by both businesses and employees

Value added tax (VAT) - This is a tax applied to most goods and services which businesses add on top of added value to create the final price

Excise duties - Are taxes applied to specific products such as petrol, cigarettes and alcohol.

Corporation tax - This is a tax on company profits.

Question 79

How does government spending affect the local economy

Answer 79

if the government increases its spending on defence, the manufacturer will benefit from increased orders. In turn this will create extra employment as workers are recruited to build the aircraft. The additional income earned by the employees will be spent in the local economy, benefiting businesses such as shops and restaurants.

Question 80

How might the monetary policy change in a recession

Answer 80

During economic recession, the Bank of England will reduce interest rates. This makes it cheaper for consumers to borrow money for expensive items. Businesses that sell these products will then benefit from increased demand and may take on additional workers. Business’ confidence in sales will rise. As a result, businesses are more likely to borrow to finance investment and expansion. This should result in economic recovery.

Question 81

Define exchange rates

Answer 81

the value of a currency expressed as another currency

Question 82

Describe the impact of exchange rates on imports and exports

What is the Acronym for this ?

Answer 82

High exchange rates mean £ is worth more against other currencies
this results in imports for UK businesses to be cheaper but exports are more expensive
Low exchange rates mean that imports are more expensive but exports are cheaper

SPICED

S trong
P ound
I mports
C heaper
E xports
D earer

Question 83

Define Inflation

Answer 83

is a persistent rise in the general price level and an associated fall in the value of money.

Question 84

Define deflationn

Answer 84

is the rate of decrease of the general price level and the corresponding rise in the value of money.

Question 85

How is inflation measured

Answer 85

The Consumer Price Index (CPI) - measures the rate of inflation based on the changes in prices of a basket of goods and services.

Question 86

How is inflation measured

Answer 86

The Consumer Price Index (CPI) - measures the rate of inflation based on the changes in prices of a basket of goods and services.

Question 87

What problems might a rising inflation rate bring to a business

Answer 87

Higher business costs
higher employee wage bill to maintain living standards

Question 88

Opportunities of international trade for uk businesses

Answer 88

access to international markets to increase sales and enable expansion

The opportunity to source from cheaper overseas suppliers, resulting in lower production costs

Question 89

Threats of international trade for uk businesses

Answer 89

Increased competition in the UK market from foreign businesses

Greater vulnerability to changes in import and export prices resulting from changes in the exchange rate

Question 90

What is protectionism intended to achieve

Answer 90

is intended to male it more difficult for foreign businesses to sell thier good and services in domestic markets and in turn it protects domestic markets and businesses from more efficient foreign firms

Question 91

drawbacks of protectionism

Answer 91

Restricts consumer choice
Can lead to a trade war

Question 92

Three factors resulting in the growth of globalisation

Answer 92

A reduction in protectionism leading to less tariffs and quotas

Multinational companies settinf up factories and offices in different countries

Improved transport and communication links enabling better distribution of goods and services as well as information

WTO= World Trade Organisationn

Question 93

Why is globalisation important to UK businesses

4 points

Answer 93

Businesses have the opportunity to learn from the best ideas from different countries.

Direct foreign investment creates jobs and wealth.

Greater foreign competition forces domestic businesses to improve in order to compete.

Businesses can sell more products overseas, allowing them to diversify.

Question 94

What are the drawbacks of globalisation to UK businesses

Answer 94

Domestic businesses may be unable to compete with more powerful foreign rivals.

Some multinationals have been criticised for exploiting the workforce in their factories, particularly in developing countries, through poor pay and working conditions.

The majority of the wealth created by multinational companies goes back to their own countries.

Question 95

Define an emgering economy

Answer 95

Describes a country with low incomes per head but one which is enjoying high rates of economic growth.

Question 96

What is the importance of emerging economies for businesses

Answer 96

Businesses take advantage of the lower production costs in emerging economies, enabling them to source their products at a cheaper price.

Due to the benefits of globalisation, a growing ‘middle class’ of consumers in emerging economies has developed. Combined with the fact that many emerging economies also have large populations, there now exists a huge market which is very attractive to Western companies.

Question 97

Define Urbanisation

Answer 97

Urbanisation occurs when more of the population move from rural areas to live in towns and cities. It usually occurs as a result of economic growth. This is because the jobs created by business tend to be concentrated in urban areas.

Question 98

Describe how urbanisation provides opportunities for businesses

Answer 98

Urbanisation provides opportunities for business because it means that there are large numbers of people concentrated in towns and cities. This represents an attractive target market.

Question 99

Describe why migration is seen as imortant for the future success of the business

Answer 99

Because:
Increases the choice of workers

it keeps wage costs lower

more workers are willing to work in undesirable sectors (argriculture)

represent an attractive niche markets

Question 100

How has consumer lifestyle changed buying behaviour

Answer 100

Consumers are busier so convienience has increased in value:
eg: shopping delivery, ready meals …

Question 101

Why has there been a increase in online sales since 2006

Answer 101

Increased use of the internet

Convenience

The growth of social media ads

Question 102

Define CSR

Answer 102

Corporate social responsibility is a form of self-regulation by which companies exceed minimum legal requirements in an attempt to be good social citizens.

Question 103

Define Pressure group

Answer 103

a group of people with common interests who organise to influence public opinion and the decisions of businesses and governments.

Question 104

Actions of CSR

6 points

not on spec but useful

Answer 104

treating customers fairly and honestly

Protecting the environment

Providing employees with good pay and conditions

Paying the correct amount of taxation

Not being involved in anti-competitive practices

Providing accurate financial information

Question 105

Reasons for CSR

3 points

Answer 105

being seen as socially responsible can create marketing benefits as it can differentiate a business from its rivals.

Many consumers are repared to buy ethical products even at a higher price

can create a good employer reputation

Question 106

Reasons against CSR

Answer 106

Could have a negativve impact on profitablibity

some businesses CSR as a PR front and actions are not authentic

Question 107

What is Carroll’s CSR pyramid (1991)

Answer 107

It illustrates the different responsibilities, in order of priority in order to be socially responsible

Question 108

Describe the levels of Carroll’s CSR pyramid

Answer 108

The first priority is economic responsibilities. This is to ensure that the business is financially viable by providing sustainable profits.

The second priority is legal responsibilities, i.e. that the business is meeting all legal requirements.

This is followed by ethical responsibilities. This means that the business behaves in a morally correct manner and goes beyond the minimum legal requirements.

Finally, the business should meet its philanthropic responsibilities by contributing to society through actions such as making charitable donations and supporting local community projects.

Question 109

What opportunities does technological change provide

Answer 109

Quicker development of new products through applications such as computer aided design and computer aided manufacture

the creation of new markets due to the development of new products

better quality products and higher productivity die to imporved manufacturing processes

Question 110

Threats of technological change

Answer 110

Shorter product life cycles due to new products constantly entering the market

High cost of investment in new tech

Danger of being left behind by rivals if business is not quick enough to adapt

Question 111

Name one internal and external technological change that has an impact on marketing

Answer 111

Internal:
Greater computing power can boost a firm’s understanding of consumer behaviour which means New product development is more specific and the new product is more likely to meet consumer needs resulting in high demand.

External:
New media have become available to widen the promotional options available.

Question 112

Name one internal and external technological change that has an impact on Finance

Answer 112

Internal:
As computer software develops, financial information can be more easily recorded, processed and, perhaps most powerfully, shared within the business on an almost immediate basis. Which can increase decision making speed and accuracy.

External:
The internet has made financial information much more easily available — heightening one of the drawbacks of limited company status. However, the ability for public limited companies to share financial reporting data with shareholders and potential investors may be a benefit.

Question 113

Name one internal and external technological change that has an impact on HR

Answer 113

Internal:
Firms adopting new technology may result in redundancies as technology takes over jobs. The need to provide training for staff who are expected to use new technology and/or the need to recruit staff skilled in the use of new technology.

External:
Increased use of technology can lead to unemployment, which of course causes problems for government and local communities.

Question 114

Name one internal and external technological change that has an impact on Operations

Answer 114

Internal:
Technology can have a revolutionise the way products are manufactured but also in the way that services are delivered. Can also Improve Job appraisal cutting down the operational staff to the most efficient possible.

External:
Technological development in operations departments have had knock-on effects on suppliers — with a greater ability to share information with suppliers, the chance to work in a genuine longterm partnership has made many firms value the role played by their suppliers even more.

Question 115

What does Porters 5 forces consist of

Answer 115

Competitive rivalry
Bargaining power of suppliers
Bargaining power of consumers
Threat of new entrants
Threat of substitutes

all contribute to the businesses overall competitive position/strength

Question 116

Define barriers to entry

Answer 116

The factors that determine the accessibility of a market for potential new entrants. These include the cost required to set up a new business, the degree of brand loyalty to existing firms and any patents owned by existing firms.

Question 117

What case might the threat of new entrants be high

Answer 117

Fast growing markets

All businesses within a market are making high profits

Few barriers to entry

Question 118

Why is Porters five forces valuable

Answer 118

helps firms reach future strategic and functional decisions. By constantly assessing its competitive environment, a business can devise strategies to exploit opportunities that may arise and counter threats it faces.

Question 119

Namer three types of investment appraisal

Answer 119

Payback period

Average rate of return

Net present value

Question 120

Describe what the payback period calculates

and desribe one benefit and one drawback

Answer 120

how long it will take to recover the initial cost of the investment.

Payback is particularly useful for projects where time is critical. However, a criticism of payback is that longer investment projects in terms of payback may be rejected, despite the fact that in the long run they may be more profitable

Question 121

What does ARR show

Answer 121

Compares the average annual profit generated by an investment as a percentage of the initial cost

Question 122

One benefit and one drawback of ARR

Answer 122

It focuses on profitability so the most profitable investment project will be the one chosen. However, it does not take into account the timing of the returns, which could be important in fast-changing markets

Question 123

Describe NPV

Answer 123

Businesses need to calculate the value of money received in the future in today’s terms. These are known as present values. To calculate present values a discount factor is used based upon the length of time the investment will last and the current rate of interest.

Question 124

One benefit and one drawback of NPV

Answer 124

As well as considering both timing and profitability, the figures used are more accurate.
However, it is a more complex calculation and the accuracy of figures is dependent upon the most realistic discount factor being chosen

Question 125

What qualitative factors influence investment decisions

4 points

Answer 125

company objectives

Source of the data

Financial position of the business

Effect on staff

Question 126

Define Investment criteria

Answer 126

The minimum financial targets set by the directors which the proposed investment must achieve, e.g. an ARR of at least 15%.

Question 127

Define Risk and uncertainty

Answer 127

The recognition that all future returns are based upon predictions. The greater the future time span of the investment, the greater the risk and uncertainty. It is important for businesses to recognise that future figures could be inaccurate.

Question 128

Define sensitivity analysis

Answer 128

It enables managers to assess the level of risk associated with that decision and assess which variables have the greatest potential impact

Question 129

What is sensitivity analysis used for

Answer 129

Cash flow forecasts
Breakeven analysis
Investment appraisal
Profit and contribution calculations