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Unit 7b -- analysing the strategic position of a business (external) -…
Unit 7b -- analysing the strategic position of a business (external)
Political and Legal
Investment appriasal
Investment analysist
-- this is where numerical data is used to predict the financial outcomes of potential capital investments.
Payback
How to calculate
Step 1
Calculate durring which year the investment will be covered in.
This is done by subtracting each years net cash flow from the inital investment until it drops below 0.
Step 2
Calculate which month the investment will be covered in.
Devide the years net cash flow by 12.
Devide the amount you have to pay off by the above number and always round up.
The longer the payback the greater the risk of the project.
One of the main flaws for payback is that it assumes that net cash flow will be the same in each month, but it wont be and there could be big differences for some businesses (those in seasonal industries).
This is used when survial is the businesses main concern (mainly used by small businesses).
Average rate of return
How to calculate
Step 1
Calculate average annual profit (total net cash flow/number of years).
Step 2
Calculate ARR using the formula (annual average profit/intial investment)*100
This enables an easy compriasson between other investment opitions, however, it does not take into account the fact that big projects may not be profitable at the start.
Used when profit maximistation is the main concern of the business (larger businesses).
Net present value
How to calculate
Step 1
Devide each of the net cash flows, for each year, by its corrosponding discount factor (this includes the investment).
Step 2
Add them all up.
This takes into account the total return on investment while also considering the fact that the investment will loose value throughout the years.
NPV could be positive, if it is not then the investment has lost all of its value.
Used when profit maximistation is the main concern of the business (larger businesses).
Qualative factors when considering investment
Quality of suppliers
Attitude of shareholders
Views of important stakeholders
Enviroment
Investment criteria
-- these are a list of measures that will be used to decide whether an investment was worthwhile (they are minimum target levels).
Sensitivity analysis
-- this is the process of changing variables to calculate a change of outcomes (e.g the best and worst case scenarios).
Risk and uncertainty
Key considerations when looking at the risk of a decision
Gearing
Stability
Opportunity cost
Competitor reactions
Time frame
Economic
Social and technoligcal
Competitive enviroment