Notes of a second year student studying Bachelors of Accounting at the University of the Free State. With this notes that i have compiled, i was able to proudly say that i received a distinction in Financial Management by using this notes. If you are struggling with Financial Management use this no...
• All about evaluating your options Primary focus:
o Pursue a higher return
Enhance shareholder value
o Avoid a lower return
Necessity of efficient investment appraisal
shareholder value and wealth
Money, money, money! – inflow > outflow.
WHY
Money is a scarce resource – utilise efficiently.
Long term decision – all profits/losses are carried forward.
WHEN
→ →
Receive money → Investment appraisal → Spend/Invest
Cash flow
WHAT × Present value of future Cash flows
× Not Accounting profit – can be manipulated
Capital budgeting:
• The process of identifying and analysing the various investment opportunities that are
available and deciding how to allocate the business’ scarce capital resources to the
investment alternatives.
Important!
Identify all
possible
Can cost you money if alternatives
you’re not following up
on projects. Determine
Following Capital Budgeting
relevant
up
Cash Flows
Weighted
Yes/No? Determine Average
Decision
company's
Rank decisions making Cost of
cost of capital
Capital
Evaluate
the project
Investment appraisal
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