Strategic Investment Decisions (AQA A Level Business): Flashcards
Exam code: 7132
1/280Still learning
Know0
- Front
Why does a business need clear reasons before committing to investment expenditure?
Was this flashcard helpful?
Cards in this collection (28)
Why does a business need clear reasons before committing to investment expenditure?
Investment expenditure ties up large amounts of capital for long periods. The business could instead keep the cash available or return it to shareholders.
How can investment in new equipment, sites or facilities help a business earn more revenue?
It increases capacity, allowing the business to produce or sell more as demand grows.
Investment in new technology or equipment can reduce ____ rates and make output more consistent.
Investment in new technology or equipment can reduce defect rates and make output more consistent.
True or False?
The main benefit of investment in research and development is lower production costs.
False.
Investment in research and development allows a business to create new products or services. This helps it stay relevant to changing customer needs.
How can a well-planned investment strategy reassure stakeholders?
It gives investors and lenders confidence that capital is being used productively. It can also strengthen the business's brand image.
Why might a business with growth objectives accept a longer payback period on an investment?
Management may accept a longer payback period in return for larger future returns from new capacity, additional sites or new markets.
True or False?
Survival objectives can lead a business to pause or cancel planned investment.
True.
When the immediate priority is staying in business, a business may hold back on investment to preserve cash.
Which investments are favoured by profit-maximisation objectives?
Profit-maximisation objectives favour investments with the fastest payback and the highest expected return.
Why might social or environmental objectives lead a business to choose a more expensive investment?
Meeting ethical or environmental targets is itself a stated priority. The business may therefore choose a more expensive, sustainable option over a cheaper alternative.
How does the cost of finance affect investment decisions?
Businesses look at how easy and cheap it is to borrow money. Low interest rates can be an incentive to take out loans for big purchases.
Government tax breaks and ____ cut the cost of an investment and make it more attractive.
Government tax breaks and grants cut the cost of an investment and make it more attractive.
Why might a business reject a project even when it could borrow to fund it?
A business will not start a project if it would leave it unable to pay its day-to-day bills, so it must consider its cash flow and internal funds.
What is the difference between risk and uncertainty in investment decisions?
Risk is where a business can estimate possible outcomes and their probabilities. Uncertainty is where it cannot make these estimates.
How can a shortage of skilled labour influence investment decisions?
A shortage of key skills encourages businesses to fund training programmes or locate where talent is plentiful.
Define investment appraisal.
Investment appraisal involves comparing the expected future cash flows of an investment with the initial outlay for that investment.
What key data must be collected before an investment can be appraised?
Key data includes sales forecasts, fixed and variable costs data, pricing information and borrowing costs.
Define payback period.
The payback period is the amount of time it is expected an investment will take to pay for itself.
Payback period = Initial outlay ÷ Net cash flow per period
A business invests £45,000 in new equipment and expects a constant net cash flow of £10,000 per year. What is the payback period?
The payback period is £45,000 ÷ £10,000 = 4.5 years, which is 4 years and 6 months.
True or False?
The payback method shows how profitable an investment will be.
False.
Payback provides no insight into the profitability of an investment. It only considers the length of time needed to recover the investment.
Why is the payback method useful where new technology is introduced regularly?
A business can calculate whether equipment pays back before an upgrade is available.
Define average rate of return (ARR).
The average rate of return compares the average profit per year generated by an investment with the value of the initial outlay.
ARR = Average annual return ÷ Initial outlay × 100
An investment of £50,000 is expected to generate a total profit of £30,000 over 5 years. What is the ARR?
The average annual profit is £30,000 ÷ 5 = £6,000. The ARR is £6,000 ÷ £50,000 × 100 = 12%.
What is the main weakness of ARR relating to cash flows?
Because ARR depends on an average of cash flows, it ignores the timing of those cash flows.
The result of an ARR calculation is expressed as a ________, which makes it easy to compare different investment options.
The result of an ARR calculation is expressed as a percentage, which makes it easy to compare different investment options.
Define net present value (NPV).
Net present value is the present value of future cash inflows minus the present value of future cash outflows, taking into account the effects of interest rates and time.
True or False?
An investment with a positive net present value is likely to be worthwhile.
True.
A positive NPV suggests the investment is likely to be worthwhile, while a negative NPV suggests it is unlikely to be.
Why are future cash flows discounted when calculating NPV?
Money received in the future is worth less than money received today. Discounting also reflects the opportunity cost of not having the money available for other uses.
Why might a business use different discount rates when calculating NPV?
Using different discount tables (e.g. 20%, 10% or 5%) lets a business adjust for the level of risk in a project and consider a range of scenarios.
Sign up to unlock flashcards
or