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A Level Business Investment Appraisal Lesson Elements.

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Presentation on theme: "A Level Business Investment Appraisal Lesson Elements."— Presentation transcript:

1

2 A Level Business Investment Appraisal Lesson Elements

3 Task 1 – Investment Appraisal Calculations

4 Task 1 – Investment Appraisal Calculations Answers

5 Payback period Machine A Cost £ = £ (year 1) + £ (year 2) = 2 years or 24 months Task 1 – Investment Appraisal Calculations Workings

6 Payback period Machine B Cost £ = £ (year 1) + £ (Year 2) + £ /£ (year 3) = 2.5 years or 30 months Task 1 – Investment Appraisal Calculations Workings

7 Payback period Machine C Cost £ = £ (year 1) + £ (year 2) + £ (year 3) + £ /£ (year 4) = years or 37 months

8 Task 1 – Investment Appraisal Calculations Workings ARP Machine A Cash inflow = £ £ £ £ = £ Cash inflow – cost = £ £ = £ £ /4 years/£ cost x 100 = 40%

9 ARP Machine B Cash inflow = £ £ £ £ = £ Cash inflow – cost = £ £ = £ £ /4 years/£ cost x 100 = 32.5% Task 1 – Investment Appraisal Calculations Workings

10 ARP Machine C Cash inflow = £ £ £ £ = £ Cash inflow – cost = £ £ = £ £ /4 years/£ cost x 100 = 22.9%

11 NPV Task 1 – Investment Appraisal Calculations Workings

12 Task 3 – Which Investment?

13 Scenario 1 The company is experiencing significant cash flow difficulties which are affecting its ability to gain further finance from its bank.

14 Task 3 – Which Investment? Scenario 2 Many of the company’s shareholders are threatening to sell their shares if share dividends do not increase in the next few years.

15 Task 3 – Which Investment? Scenario 3 The company is new and the shareholders are willing to take risks for potential high returns.

16 Task 3 – Which Investment? Scenario 4 The directors of the company are risk averse. They are cautious and experienced. Option C involves diversification.

17 Task 3 – Which Investment? Scenario 5 The company operates in a market which is subject to rapid change, especially beyond year 3. The company has no cash flow problems and the investors want high returns.

18 Task 3 – Which Investment? Scenario 6 The company trades on its ethical and socially responsible branding. Project B would not be perceived by the public as environmentally friendly.

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