F2 - Cashflow Cycles & Analysis CH2 Investing Cash Flow Cycle

Investing Cash Flow Cycle

What is a capital investment (CapEx)?

Purchase of an asset with useful life greater than 1 year (PPE, software, acquisitions).

How is Net Capital Investment defined?

Gross purchases − Gross disposals.

Give three examples of gross purchases (capex).

Land/buildings, machinery, technology/software.

Differentiate sustaining vs growth capex.

Sustaining: maintain existing operations (lower risk). Growth: expand capacity/new lines (higher risk).

What are tangible vs intangible capital assets?

Tangible = physical (PPE). Intangible = non-physical (patents, software).

Why is distinguishing sustaining vs growth capex important?

It affects cash planning and signals whether capex preserves or expands revenue-generating capacity.

What is the long-term investment cashflow cycle (basic flow)?

Invest cash out → Use assets to generate revenue → Achieve payback/returns → Depreciate assets → Reinvest or distribute.

What is “payback period”?

Time to recover initial cash outlay from project cash inflows.

What’s the basic ROI concept for capex?

(Net benefit over life ÷ initial investment). This measures profitability of investment.

Name two financial criteria used to evaluate projects besides payback.

Net Present Value (NPV) and Internal Rate of Return (IRR).

Why do firms perform due diligence before capex?

To validate assumptions, risks, required expertise, and expected returns.

What operating capabilities make capex more likely to succeed?

Management experience, technical know-how, and scalable operations.

How does depreciation affect cashflow analysis?

Depreciation is non-cash expense — reduces accounting profit but not cash; tax effects must be handled separately.

Why might a company finance capex rather than pay cash?

Preserve liquidity, match payment to benefit period, or leverage favourable financing.

What cashflow statement section records capex?

Investing activities — cash outflows for purchases, inflows from disposals.

How does selling an old machine show up?

Cash inflow in investing; gain/loss on sale affects income statement.

What is “sustainable level of capex”?

Ongoing capex needed to maintain current operations and competitiveness.

Why monitor capex trend over time?

Persistent under-investment can signal decline; persistent over-investment can strain cash.

Give one example of intangible capex that may be high-return but risky.

Major software platform development.

What makes a capex project “high expected return”?

Strong incremental cashflows, short payback, strategic fit and low marginal cost.

How do acquisitions appear in capex analysis?

As investing cash outflows; evaluate separately for integration, synergies and goodwill implications.

What is “net capital invested in PPE” on cashflow?

Gross PPE purchases − proceeds from PPE disposals.

How should tax effects be treated in project ROI calculations?

Include after-tax cashflows and tax depreciation/treatment in NPV/IRR.

Name one operational risk to capex returns.

Implementation delays or higher-than-expected operating costs.

Why is expertise important before committing to large capex?

To ensure realistic forecasts, manage implementation and achieve expected returns.

How does capex tie into strategic objectives?

Sustains core operations or enables growth/market entry per strategy.

What role does scenario analysis play in capex decisions?

Tests project resilience under different demand/cost/price outcomes.

How does depreciation method choice affect early tax payments?

Accelerated tax depreciation lowers taxable income earlier, reducing near-term taxes and creating deferred tax differences.

What is “CAPEX efficiency” intended to monitor?

Ratio of revenue or EBITDA generated per unit of capex invested (productivity of investment).

Give two signs a firm is wisely balancing capex.

Sustaining capex prevents asset decline; selected growth capex shows clear payback and is funded without excessive leverage.