Investment Appraisal / Capital Budgeting (Cima P2 / Acca Fm)

Investment appraisal (especially focusing on net present value)

What you'll learn

Apply the following for decision-making: a. Relevant cash flows b. Non-financial information

Explain: a. Investment decision making process b. Discounting c. Capital investments as real options

Apply the following to evaluate projects: a. Payback b. Accounting rate of return c. IRR d. NPV e. Discounted payback f. MIRR

Apply capital rationing, sensitivity analysis and asset replacement cycles

Requirements

Basic knowledge of compounding and discounting

Description

In this comprehensive course, participants will delve deeply into the realm of capital budgeting, also known as investment appraisal. Through a structured curriculum, learners will gain proficiency in a range of essential techniques crucial for effective financial decision-making in business ventures. This course is ideal for candidates pursuing CIMA subject P2 or ACCA subject FM.The course begins by elucidating fundamental concepts such as the payback period, which measures the time required for an investment to recoup its initial outlay. Participants will then progress to more advanced methodologies, including the discounted payback period, which adjusts for the time value of money, and the accounting rate of return, which evaluates profitability based on accounting profits relative to the initial investment.A central focus of the course is the thorough exploration of net present value (NPV), a cornerstone of capital budgeting that factors in the time value of money to determine the present value of future cash flows. Participants will learn to calculate NPV and its variations, understanding how to incorporate adjustments for tax implications, inflationary pressures, and fluctuations in working capital.Moreover, the curriculum extends beyond basic techniques to encompass nuanced topics such as capital rationing, wherein investment opportunities are evaluated and prioritized within budget constraints. Learners will also gain insights into asset replacement cycles, essential for optimizing capital allocation and maintaining operational efficiency.Furthermore, the course equips participants with the analytical tools for conducting sensitivity analysis, enabling them to assess the impact of changing variables on investment outcomes and make informed strategic decisions.In addition to mastering traditional capital budgeting techniques, this course provides participants with a valuable introduction to real options theory—a cutting-edge approach to investment analysis that accounts for the flexibility and strategic decision-making inherent in uncertain environments. Real options theory extends beyond traditional discounted cash flow models by acknowledging the value of managerial flexibility to adapt and capitalize on future opportunities or mitigate risks. Participants will explore how real options theory applies to various business scenarios, such as the option to expand operations, defer investment, or abandon projects based on evolving market conditions. By integrating real options theory into their analytical toolkit, participants will be empowered to make more robust investment decisions that not only optimize financial returns but also position their organizations to thrive amidst uncertainty and volatility in today's dynamic business landscape.

Overview

Section 1: Investment Appraisal

Lecture 1 Introduction and relevant cash flows

Lecture 2 Payback period

Lecture 3 Accounting rate of return (ARR)

Lecture 4 Time value of money and discounted payback period

Lecture 5 Introduction to NPV

Lecture 6 NPV question with relevant cash flows

Lecture 7 NPV and tax adjustments

Lecture 8 NPV and inflation adjustments

Lecture 9 NPV question with tax

Lecture 10 NPV and working capital, Pros and cons of NPV

Lecture 11 NPV question with all adjustments

Lecture 12 Internal rate of return (IRR)

Lecture 13 IRR advantages and disadvantages

Lecture 14 Modified internal rate of return

Lecture 15 Annual equivalent cash flow and asset replacement cycle

Lecture 16 Capital rationing

Lecture 17 Sensitivity analysis and Monte Carlo Simulation

Lecture 18 Post completion audit, perpetuities and changing discount rates

Lecture 19 Real options

Management Accounting and Financial Management students. Primarily for CIMA P2 and ACCA FM students.