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B294 - Unit 4 - Coggle Diagram
B294 - Unit 4
Session 1
Investment appraisal techniques
Different projects have
Varying
Costs
Time investment
How much management is necessary?
Do we have right skills?
Success rates
Payback rates
Impact on brand
Internal
External
Alignment with CSR?
Also known as capital budgeting
Evaluations of investment options
Generate maximum shareholder return
Fine line between
Lots of profit
Lots of cost
Risk vs return
Include uncertainty and error
Estimates made on cash flow
Conduct post-completion audit
Assess if assumptions were correct
Improve future decision-making
Four most common
Accounting rate of return (AAR)
Does not consider time value of money
Based on future expected profits
Provides estimate of % investment recovered per year
Does not provide much information by itself
Consider relative to other investments
Managers usually have expected rate of return
Target rate of return
If higher, project is accepted
Lower = project rejected
Ignores scale of poject
Including total profit to business
Estimated profit relies on subjective accounting
Depreciation
Inventory value
Net present value (NPV)
Considers time value
Based on future cash flow
Difference between total present value and the initial cash investment
Decide between mutually exclusive capital
One option becomes redundant
Limited funds
Capital rationing constraint
Invest in best return
Shows potential net change in value
Clear accept or reject decision
Provides absolute figure, not %
Terminology not always understood by managers
Discount rates can be challenging
Payback period
Does not consider time value of money
Based on future cash flow
Used with other methods
Calculates time taken to recover investment cost
Useful if low resources or liquidity
Faster payback = less risk
Short-termism
+Simple to calculate
+Easy to understand
Less-useful in analysis projects with similar return periods
Internal rate of return (IRR)
Considers time value
Based on future cash flow
Discounts future cash flows to zero
Cost of capital
If greater than
Generates value
If less than
Generates loss
Involves trial and error
More complex than other methods
Made easier with Excel
Must have at least one
Positive value
Negative value
Intital investment entered as negative number
Cash inflow for each period in cell below
1 more item...
Intervals need to be same
Annually
Monthly
Values in chronological order
Method is
Find discount rate for positive NPV
Find discount rate for negative NPV
Apply linear interpolation method
Achieves NPV of 0
Results can be misleading in unconventional cases
Multiple IRRs
No IRR
All positive or all negative cash flows
Ignores scale of projects
Assumes cash flows are reinvested at IIR rate
Rarely happens
Session 2
Issues within investment appraisal
Identifying relevant costs
Must be a cash flow
No depreciation
Cost must be incremental
Arise due to project undertaking
Cost must arise in future
Past (sunk) costs irrelevant as already spent
Market surveys
Previous R&D
Non-financial factors
Underlying company objectives
Long-term ambitions / survival
Impact on reputation
Accuracy of NPV assumptions
Incomplete or missing data
Misunderstanding discovered
Cash flow predictions wrong
Environmental impact
Health ans safety impliications
Consider in combination with STEEPLE