1
Q
Advantages of working out payback (4 points)
A
- simple to calculate
- easy to understand
- emphasises cash flow by focusing on time taken to pay back
- with rapid change the shorter the time to reap the rewards the better
2
Q
Disadvantages of working out payback (4 points)
A
- Doesn’t consider the total reward of the project, stops at payback (profit is what most firms look for)
- no average: unique depending on investment
- future costs and revenues valued the same as now
- short term in nature: what are the long term implications of the investment
3
Q
Advantages of working out ARR (3 points)
A
- uses all cash flow over the projects life
- focuses on profitability
- easy to compare percentage returns on different investments, helping with decision making
4
Q
Disadvantages of working out ARR (4 points)
A
- If the investment is likely to last for many years then projected future returns may be inaccurate
- ignores the timings of cash flows
- ignores opportunity cost of the money invested
- doesn’t factor in time value of money (inflation)
5
Q
Advantages of net present value (3 points)
A
- Takes the opportunity cost of money into account
- A single measure that takes the amount and timing of cash flows into account
- can consider different scenarios
6
Q
Disadvantages of net present value (4 points)
A
- complex to calculate and understand
- the meaning of the result is often misunderstood
- doesn’t take into account speed of repayment
- difficult to chose the correct discount factor
7
Q
Advantages of sensitivity analysis (4 points)
A
- ensures the business considers a range of outcomes
- Helps the business see which variables will be key to success
- the business can prepare for risk/uncertainty
- simple to complete and understand
8
Q
disadvantages of sensitivity analysis (3 points)
A
- no guarantee that any of the outcomes will happen
- relies on the skill of the forecaster
- could be manipulated
Business
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Decks in class (14)
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