Accounting Aqa- Capital Investment Appraisal

Front 1

Define Capital Investment Appraisal.

Back 1

Capital investment appraisal enables a business to make decisions as to whether or not to invest in a particular capital investment project and, where there are alternatives, to assist in deciding in which to invest.

Front 2

Define Payback Period.

Back 2

Payback is the period of time it takes for the initial cost of capital investment to be repaid from net cash flows inflows.

Front 3

What are four advantages of payback?

Back 3

1. It is easy to calculate
2. It is easy to understand
3. It places emphasis on the earlier cash flows, which are more likely to be accurate than later cash flows
4. Its an ideal capital investment appraisal method for high technology projects.

Front 4

What are six disadvantages of payback?

Back 4

1. All cash flows after payback period are ignored.
2. Within the payback period it fails to consider the timing of net cash flows.
3. The effects of inflation are ignored.
4. The time value of money is ignored, unlike the discounted cash flow method.
5.The life of an asset is not considered
6. The estimates of cash flows may be inaccurate

Front 5

A project costs 22,000 at the beginning of a project. The first 3 year cash flows are 8,000, 12,000 and 5,000 (respectively). what is the payback period?

Back 5

2 years + (2,000/5,000*12 moths)= 2 years and 4.8 months.

Front 6

Define discounted cash flow.

Back 6

Discounted cash flow is a method of capital investment appraisal which recognises that money has a time value- it compares net cash flows, at their present values, with the initial cost of the capital investment to give a net present value of the capital project.

Front 7

What are 4 advantages of discounted cash flow?

Back 7

1. All cash flows are considered
2. The time value of money is uses
3. The timing of cash flows is taken into account.
4. Although more complex to calculate than payback, when using a table of factors the calculations are easy to make.

Front 8

What are 4 disadvantages of discounted cash flow?

Back 8

1. The rate of return is, in practice, difficult to ascertain and may also vary over the life of a project.
2. The meaning of net present value is not always clear to users of the information.
3. When comparing two projects, the one with the higher net present value does not always represent the better project for the firm.
4. The estimates of cash flow may be inaccurate.

Front 9

What are some other considerations for capital investment

Back 9

Total implications for the business, cost of finance, taxation, forecasting techniques and size of investment relative to the size of the business.