Co-dhùnaidhean Mu Ghnìomhachasan

Study Notes

An investment screening process involves identifying ideas aligned with company goals.
Cost-benefit analysis, using techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and others, assess investment potential.
Selection of the best project requires thorough analysis and justification.
Capital budget proposals must be reviewed and authorised by senior management.
Implementation involves executing the project and tracking its progress.
Post-audit reviews help assess and evaluate the project's success.
Sunk costs are costs already incurred and cannot be recovered. Examples include marketing, research, and salaries.

Independent projects are evaluated separately, while mutually exclusive projects, such as two competing factories, must be evaluated comparatively to determine the most lucrative option.
Unlimited funds versus capital rationing: decisions under different financial constraints are considered.
Conventional versus unconventional cash flow patterns are considered.
Annuity versus mixed stream cash flows: different patterns of cash flows through time are considered during evaluation.

Initial cash flow, operating/recurring cash flow, and terminal cash flow are considered.
Initial cash flow comprises project costs, investment sizes, and any related expenses.
Operating cash flow tracks ongoing revenue generation and costs for the project's life.
Terminal cash flow includes any sums after the project is finished, salvaged, or decommissioned.

Flexibility viewpoint of projects: important to consider how long funds will remain tied up in a project.
Cost estimation errors: over or underestimation can lead to project miscalculations.

Ranking approach: if many projects are desirable, ranking them according to priorities, testings, and criteria can help choose the best one based on return and revenue estimation.
Conventional cash flow: a series of cash inflows followed by cash outflows.
Unconventional cash flow: cash flow patterns may change during the project life.
Annuity: consistent stream of cash flows throughout a set period; considered fixed or perpetual.
Mixed stream: irregular cash flows.

Important to consider the financial statements to determine the company's financial health, for example, the Income Statement.
Also important to check balance sheets to analyse the overall condition and financial health.
CF's statement: important to derive fundamental financial statements.
Income statement assists in assessing project return, profit, and costs over set periods.
Balance sheets help assess project investment sizes and effects.
Depreciation is often a non-cash expense, impacting profitability figures.

Project evaluation needs to consider the time value of money, assessing the present value of future earnings.
Payback period assesses how long it takes an investment to be recouped.
Internal rate of return (IRR) calculates the discount rate that makes the net present value of all cash flows zero.

Calculate the present value of all expected cash flows, then subtract the initial cost..
Investment decisions with a positive NPV will increase a firm's shareholder value.

Determines the discount rate at which the NPV of the project equals zero.
Investment decisions that have an IRR greater than the hurdle/discount rate are considered favourable.
IRR is the discount rate that makes the project's NPV zero.

Capital structure and interest rates can constantly fluctuate, requiring consideration during an evaluation of a project.
Risk, economic conditions, and changes in capital structure might affect capital budgeting decisions.