9609 · 10.3.1
The concept of investment appraisal flashcards
Revision flashcards for Cambridge 9609 The concept of investment appraisal (syllabus 10.3.1). Flip, recall, then mark a real past-paper question.
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Purpose of investment appraisal?
To assess whether a capital project is financially worthwhile and supports business objectives.
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What is a relevant (incremental) cash flow?
A future cash inflow or outflow that changes because the project goes ahead.
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What is a sunk cost?
Past expenditure that cannot be recovered — excluded from appraisal.
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Capital vs revenue expenditure?
Capital: long-term assets (machinery). Revenue: day-to-day operating costs (wages, materials).
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Why are investment decisions risky?
Large, irreversible spending; forecasts of future cash flows may be wrong.
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Qualitative factor examples?
Brand image, employee morale, environmental impact, strategic fit, market entry.
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Opportunity cost in appraisal?
Return forgone from the next best alternative use of capital.
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Link to strategy (6.2)?
Appraisal checks whether projects support long-term direction, not just short-term profit.
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What is meant by 'investment appraisal'?
A set of analytical techniques used to evaluate the potential financial viability and profitability of a long-term capital investment project, helping managers make informed decisions about resource allocation.
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Define 'capital expenditure'.
Spending by a business on non-current assets (fixed assets) such as machinery, property, or vehicles. These are long-term investments intended to help the business generate future income.
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What are the three key characteristics of a 'relevant cash flow' in investment appraisal?
It must be a future flow (not past), an incremental flow (a direct result of the project), and an actual cash flow (not an accounting profit).
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Why are 'sunk costs' ignored in investment appraisal?
Sunk costs are past, unrecoverable costs. As they have already been incurred and cannot be changed by any future decision, they are irrelevant to the choice between current investment options.
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Give two examples of qualitative factors that might influence an investment decision.
1. The impact on the company's brand image and reputation. 2. The effect on employee morale and working conditions. (Other examples: environmental impact, legal compliance).