9609 · 10.3.4
Investment appraisal decisions flashcards
Revision flashcards for Cambridge 9609 Investment appraisal decisions (syllabus 10.3.4). Flip, recall, then mark a real past-paper question.
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Primary financial criterion at A Level?
NPV — choose higher positive NPV for mutually exclusive projects.
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When does payback override NPV?
Rarely in theory; practically when firm faces severe cash shortage and needs fast capital recovery.
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Qualitative override example?
Positive NPV project rejected due to environmental damage or brand harm.
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Structure of a recommend answer?
Quant summary → qualitative factors → balanced recommendation with justification.
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Conflicting ARR and NPV?
Prefer NPV for shareholder wealth; explain ARR uses accounting profit and ignores timing.
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Strategic fit?
Whether project supports long-term goals (market entry, diversification, technology).
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Risk in appraisal?
Forecast error, market change — sensitivity analysis or shorter payback may matter.
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CSR in investment?
Environmental/social impact may require accepting lower financial return.
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What are 'qualitative factors' in the context of investment appraisal?
Non-numerical factors that influence an investment's success. Key examples include the impact on brand image, employee morale, environmental considerations, competitive reactions, and alignment with corporate objectives.
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What should a manager do if Payback and NPV calculations recommend different projects?
The manager must consider the business's strategic priorities. If liquidity and minimising risk are paramount, the project with the shorter payback might be chosen. If the primary goal is maximising long-term shareholder wealth, the project with the higher positive NPV is usually the superior financial choice. This conflict must be resolved by considering qualitative factors and corporate objectives.
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Why is 'strategic fit' a crucial consideration for an investment decision?
Strategic fit ensures a project aligns with the company's long-term mission and goals. A financially attractive project that contradicts the corporate strategy (e.g., a low-quality product for a premium brand) can cause long-term damage to reputation and market position, outweighing any short-term financial gains.
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What is the difference between risk and uncertainty in investment appraisal?
Risk involves future outcomes where probabilities can be reasonably estimated (e.g., a 10% chance of raw material costs increasing). Uncertainty involves future outcomes where the likelihood cannot be predicted or quantified (e.g., the sudden emergence of a disruptive new technology).
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What is the key to making a 'justified' investment recommendation in an exam?
A justified recommendation requires a balanced evaluation. You must analyse the quantitative data (NPV, ARR, Payback), integrate relevant qualitative factors, and make a final judgement that weighs these elements in the specific context of the business, explaining why your chosen project is the most suitable overall.