Please enable JavaScript.
Coggle requires JavaScript to display documents.
CHAPTER 7 - Coggle Diagram
CHAPTER 7
Factors affacting investment decision
The expected net return each year
degree of uncertainty
Cost of investment
the risks if investment failed
Methods of inestment appraisal
Average rate of return(ARR)
calcuates the average profit per year as a percentage of the initial cost
Process:1.calculate total profit earned 2.divide by number of years 3.devide by initial investment
ADV.: It takes the overall return into account. They can make comparison when choosing different firms to invest
it does not consider the payback time, return might last long
Net present value(NPV)
takes account of the time value of money
Process: (Net inflow * discount factor)-initial investment
ADV: Take time value of money into account,as well as the payback time and total returns. Focus on the absolute profitability
DISADV.: Relies on accurate assumption
Payback
the time needed to earn the initial costs of the investment
ADV.: it is relatively simple to calculate and understand
DISADV.: it only shows when the initial cost can be recovered but does not indicate the overall earning.May lead to potential loss.
Problems of investment appraisal
all methods are based on forecats and assumption. It will be useful only if the forecasts are accurate
It dose not consider the factors like impact on morale, brand etc.
NON-Financial criteria that has to be taken into account when making decision
degree of risks invovled
Change in demand
Price fluctuation
degree of business confidence
ethcis of investment
impact on staff
uncertainty
Future regulations
technological change
economic outlook
Sensitivity analysis
Identify risks and possible benefits that can brough to the firm
Take more possible outcome into account, help firm to aviod uncertainty.