W05_L01_Decision Making and Investment Appraisal(1) (1)

What is the first objective of the Engineering Management and Law course?

To review and compare common investment appraisal methods.

What are the five common investment appraisal methods?

Pay back period, accounting rate of return (ARR), internal rate of return (IRR), net present value (NPV), and decision making.

What is capital budgeting also known as?

Capital Investment Appraisal.

What is the primary objective of capital budgeting?

To find investments where the returns exceed the cost of capital.

What should a firm do if it cannot provide greater returns than safer financial assets?

Return available funds to shareholders.

In the Payback Method, what is considered a better investment?

A shorter payback period.

What does the ARR stand for in investment appraisal?

Accounting Rate of Return.

What is a limitation of the Payback Method?

It ignores the time value of money.

How is ARR calculated?

ARR = Average Accounting Profit / Average Investment.

What is the Net Present Value (NPV) method used for?

To calculate expected monetary gain or loss from a project by discounting all future cash inflows and outflows to the present.

What indicates acceptance in NPV analysis?

Positive or zero NPV.

What do Discounted Cash Flow (DCF) methods account for?

The time value of money.

What does IRR represent in investment appraisal?

The discount rate that equates the present value of initial investment to the present value of expected cash inflows.

What is an advantage of the Payback Method?

It is widely used and simple to understand.

What is the primary challenge of Evidence Based Decision Making?

Outcomes cannot be predicted due to future uncertainties.

What does Multi-Criteria Decision Making (MCDM) involve?

Considering multiple attributes or decision criteria for making a choice.

What is an example of a monetary metric used in investment appraisal?

Profit.

How can a decision matrix be used in investment appraisal?

To weigh and compare alternatives based on their attributes.

What does a Pareto optimal solution mean?

No adjustment is possible without making some criterion worse.

In which stage of capital budgeting do financial managers get involved?

Selection Stage, Financing Stage, Implementation and Control Stage.

How do the Payback and NPV methods differ in their recommendations for projects?

They can lead to different recommendations based on cash flow timing and return calculations.

What did Peter Drucker state about the purpose of a business?

The purpose of a business is to create and keep a customer.

What should businesses focus on according to Steve Wozniak?

Finding things that are worthless and eliminating them.

What can affect the recommendations of NPV analysis?

The discount rate applied.

What assumption does the Casino investment fable make?

That a player will eventually win if they keep doubling their stakes.

What is an annuity?

An investment that pays a fixed rate of return for a certain period and ceases upon death.

What is the moral of the Beating the Market fable?

Only a few can time the market perfectly.

What are the typical cash flow components of an investment appraisal?

Initial investment, future cash inflows, and operating expenses.

What should a formal record of decision making include?

The decision and rationale, to defend against later accusations.

What are the expected cash flows for a project discounted against?

The Required Rate of Return (RRR) or cost of capital.

What does the Boston Consulting Group Product Portfolio Matrix help businesses decide?

Which products to invest in, maintain, or eliminate.