Edexcel Business A Level Revision

Investment Appraisal - The use of numerical techniques to predict the financial outcomes of potential capital investments. Payback - The length of time (payback period) required to recover the cost of an investment in a project. FORMULA  - PAYBACK NET CASH FLOW IN YEAR THE INITIAL INVESTMENT IS REPAID / 12 MONTHS = £?  REMAINING CASH TO BE PAID IN FINAL YEAR TO REACH THE REPAYMENT TOTAL / £? = DECIMAL = MONTHS A BUSINESS WANTS THE LOWEST PAYBACK TIME IN ORDER TO BECOME PROFITABLE QUICKER. Interpretarion of payback gives a prediction of when the investment will be paid back and more importantly the point at which it will start to  make a profit for the business. Businesses can use payback to consider a number of potential options and then choose the investment with the fastest payback. Alternatively, businesses may allow investment only if payback is within a maximum period of time, for example 24 months. Advantages Disadvantages ...

Historical figures - budget initially based on the figures from previous period (year) Extrapolation - means assuring that past trends will continue into the future. It must be used with care because changes in business conditions may require adjustments to be made. For an existing business it may be best to produce a budget based on previous figures, such as last year's sales and costs. This approach uses extrapolation to model the next year's targets As the product moves through its life cycle, it places different demands on budgets, for example less adverting may be needed. Allowances need to be made for inflation, to ensure estimates are correct Sales figures can be unpredictable  Costs may not be the same Economic variables such as the business cycle can affect budget figures Unforeseen events such as the euro crisis can affect budgets.  A historical budget is realistic in that it is based on actual results, HOWEVER, circumstances may have changed (e.g. new ...