Explain that normal budgeted expenditure covers 12 months of day-to-day expenditure, not long-term capital investment.
Define Investment Appraisal and explain why it is important. Briefly discuss the main types of investment appraisal.
Explain why using DCF to produce an NPV is theoretically the best measure, and that a profitability index (PI) helps select the most attractive NPV when funds are scarce by ranking the projects.
Benefits of using NPV
- Takes time value of money into the account
- The company’s cost of capital can be used as the discount rate
- Discounts future expected cash flows to today’s monetary values using an appropriate cost of capital
- Looks at all cash flows
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