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Mock Paper 1 Revision (Payback Period (Positives (Easy to calculate,…
Mock Paper 1 Revision
Payback Period
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Focuses on cash flow and focuses on cumulative cash flow until the moment it reaches the amount invested for the project
If investment is 500,000, year 0 = -500,000
First year cash flow is 100,000. Year 1 = -400,000 and so-on
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If payback is not achieved in year 3 but is + at the end of year 4, then payback was achieved somewhere in between.
Divide how much money is needed at the end of year 3 to reach payback by how much was mad in year 4.
If in year 3 you were still -75,000 and you made 150,000 in year 4, you would reach payback. 75,000 / 150,000 = 0.5. Payback = 3.5 years
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Negatives
Ignores cash after payback, doesn't look at overall project return.
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Triple Bottom Line
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What is it?
A concept that encourages the assessment of overall business performance based on three important areas: Profit, People and Planet. It measures success financially, socially and environmentally
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Innovation
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Process Innovation
Finding better or more efficient ways of producing existing products, or delivering existing services
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Risks
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Availability of finance: Research and development competes for scarce cash, R&D demands high rate of return and investing can be costworthy
Uncertain commerical returns: No guarantee of future profits, product may fail
Debt Factoring
A business sells its debts (receivables) on to a third party (factor) at a discount for quick cash. May also sell receivable assets to meet immediate cash needs
Advantages
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Saves time and resources. No need to spend time and resources on the task of invoice claiming and payment collection. Competition in factoring business is high so costs are not massive
Frees ongoing working capital. Businesses using factoring companies enjoy more flexibility. Direct access to invoiced funds make it possible to repay ban facilities and release previously pledged security
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Enables better customer management. Factroing company will credit check potential customers, lets businesses have a higher chance of trading with customers who will pay on time. Customers will respect the factors and will e more prone to pay quickly
Disadvantages
Loss of profit. Debt factoring comes at a price. A percentage of factored funds will be taken from the second transaction, resulting in a loss of profit
Loss of image control. Need to make sure factoring company is trustworthy. Some customers will wish to deal with business/provider directly. Businesses place their most valuable assets (client base) in outside hands. Brutal factors may affect their image
Debt factoring means debt. Not always defined as such, facotring means businesses owe funds to their factors. This is only paid when their customers pay. If a business wants to terminate their contract with a factoring company, they will have to pay off unpaid invoices by themselves.
Fair Trade
Key Aims
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Improve production standards. A grower will be able to receive a Fair Trade license if it can imporve working conditions, better pay and a guarantee of environmental sustainability
Fairtrade premium price may be offered - for direct investment in improving business and communities. E.g. 2008 Tate & Lyle announced their sugar would be Fairtrade, benefitting 6000 sugar producers who would receive Fairtrade premium
Critics
Impact on non-participating farmers: Encouraging consumers to buy Fairtrade cuts demand for farmers in poorer nations without Fairtrade thereby risking worsening extreme poverty
Who captures the gains from Fairtrade coffee? Some evidence that a large part of the premium price goes to processors and distrbutors rather than the farmers
Argued that fundamental causes of poverty are not addressed. Greater invetsment needed in raising farm productivity therefore reaching multi-lateral trade agreements to reduce tariff imports and improve access for poor countries
Free market think-tanks believe that Fairtrade resulted in excess coffe production for example, which has driven down world coffee prices
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