Chapter 6 Making Investment Decisions: Chapter 6 Making Investment Decisions At the end of this chapter you will be able to Explain the ways in which investment can help businesses to reach functional objectives Select and use investment appraisal techniques Identify and apply appropriate investment criteria Assess the risks and uncertainties of specific investment decisions Evaluate quantitative and qualitative influences on specific investment decisions. PowerPoint Presentation: Payback If we look at Machine A first For all of our appraisal methods we need a cash flow table It must always start with year zero not 1! Added to your Shopping Cart! Business Explore Business Search Go. Scientific Decision Making Study notes. Or does it? The two most important factors to consider are the management of the case study business and the market in which it operates.
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As we’ve said many times, good application opens the door to good analysis and pushes student answers up to the highest levels of evaluation. Nowhere is this more important than in the use of investment appraisal. This is because investment appraisal is all about making forecasts about the future. Those forecasts absolutely have to take account of the nature of the case study firm and the market in which it operates. Investment appraisal calculations also have to make use of investment appraisal questions buss3 based on assumptions usually made by the case study management. Imagine we have two case study firms who have produced investment forecasts which can be summarised as follows:.
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Hello sir, Hope you are fine! Sales revenue. Costs 1. The capital cost of investment is 2 million. Calculate NPV of the investment project in nominal terms and comment on its financial acceptability. The inflated sales revenue and costs are given in solution as: Year. Thanks in advance!
As we’ve said many times, good application opens the door to good analysis and pushes student answers up to the highest levels of evaluation. Nowhere is this more important than in the use of investment appraisal.
This is because investment appraisal is all about making forecasts about the future. Those forecasts absolutely have to take account of the nature of the case study firm and the market in which it operates. Investment appraisal calculations also have to make use of data based on assumptions usually made by the case study management.
Imagine we have two case study firms who have produced investment forecasts which can be summarised as follows:. Looking at the two businesses above, if you could go ahead with just one investment project, which one would it be? The standard textbook answer is to say that Business A has the best investment opportunity of the two. The payback period for the investment is just 1. Operating in a fast-growth market, this looks like a business that needs to take some risks and the proposed investment looks promising.
Remember that evaluating investment appraisal is all about considering the future. The investment involves taking a risk. But does the data suggest the risk is worthwhile? Can the assumptions that have been made be relied upon? Are they likely to be too optimistic or too pessimistic? The two most important factors to consider are the management of the case study business and the market in which it operates. Management are experienced and cautious.
They’re likely to have put together some relatively cautious forecasts about the investment. I suspect that actual returns cash flows, profits might turn out to be better than they’ve assumed — which would mean that their investment appraisal could be too pessimistic at the moment. Business B also operates in a low growth and highly predictable market.
That doesn’t sound very exciting, but it makes for more reliable market forecasts which again might lead to better quality investment appraisal. By contrast, students using the skill of application might express some reservations about Business A’s investment project. Sure, the calculations look positive and it is worth mentioning this in an exam answer.
However, the smart student would reflect on the evidence that the investment project might produce results that are much worse than forecast. For example, we are told that Business A operates in a fast growth market that is subject to rapid change. That ought to be a warning sign.
Rapid change implies a market in which it is difficult to make accurate forecasts. You might expect profit quality to be low more volatile and cash flows to change significantly. We’re also told that Business A’s management are energetic but inexperienced. This is another warning sign that the investment appraisal results might be too optimistic and a little unreliable.
In general, using a low discount factor tends to make NPV calculations look more favourable and can lead to a firm accepting a project when it might be better to reject it. My hunch is that Business B’s investment project is more attractive than Business A.
In a sense it doesn’t matter. What matters is that investment appraisal questions buss3 BUSS3 answers about investment appraisal you take some time to address the context of the case study firm, management and market and how that might influence whether the project is likely to achieve the returns forecast for it.
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Cart Account Log in Sign up. Business Explore Business Search Go. Business Blog. Print page. Let’s take a simple example to help explain why application is so important. Or does it? Could Business B be a better bet? Take a look at Business B Management are experienced and cautious. I suspect that actual returns cash flows, profits might turn out to be better than they’ve assumed — which would mean that their investment appraisal could be too pessimistic at the moment Business B also operates in a low growth and highly predictable market.
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More Study presentations. Join s of fellow Business teachers and students all getting the tutor2u Business team’s latest resources and support delivered fresh in their inbox every morning. For example, we are told that Business A operates in a fast growth market that is subject to rapid change. PowerPoint Presentation: Qualitative influences Decisions will not only be based on numbers Managers will think about Whether the investment is ethical How it will affect worker motivation What consumers will think How it will affect society Will it negatively affect the brand A decision on whether to relocate manufacturing abroad may look good financially but will mean redundancies, negative publicity and exploitation of cheap labour sources. The two most important factors to consider are the management of the case study business and the market in which it operates. Nowhere is this more important than in the use of investment appraisal. Automatically changes to Flash or non-Flash embed. Workforce Planning Revision Presentation Study presentations. Go Premium. We’re also told that Business A’s management investment appraisal questions buss3 energetic but inexperienced.
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