Payback period

(equation and its use)

cost of investments/annual cash inflows

Measures amount of time it takes to recover the cost of investment project

Average Rate of Return (ARR)

Equation and its use

Net return per annum/capital outlay (cost) = ARR (%)

Net return each year as percentage of capital cost

Discounted cash flow

- How it is calculated

- Why it is used

Calculated using a discount table (given)

Used because the value of money can change over time. DCF takes this into account.

Net present value (NPV)

-Equation

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Source: http://www.bized.co.uk/learn/business/accounting/busaccounts/notes/bs.htm?page=15

Cash-flow forecasts

- Purpose

- Limitation

* Shows cash shortages

* Only estimates

Working Capital Management

- How can working capital be managed?

* Final accounts

* Ratio analysis

* Monitoring inflow/outflow

Favorable - helpful to company

Ex: receiving more income than expected

Adverse - detrimental to the company 
Ex: receiving less income than expected

- Trading account

- Profit and loss account

- Appropriate account

Last in first out (LIFO)

- Definition

-  Purpose

Most recent items sold first.

Good for tax purposes, but can look bad to shareholders.

First in first out (FIFO)

- Definition

* Profitability Ratio

Gross profit / sales revenue  x  100

A measure of how well each dollar of a company's reenue is avaliable to meet expenses

Net profit before interest and tax / sales revenue

x 100

Measures earnings after tax.

Current assets / Current liabilities

Measure of business's liquidity based on ability to generate cash and pay short-term debts.

Good ratio = 2:1

Current assets - stocks / current liabilities

Measure ability of company to use its near cash or qucik assets to retire its current liabilities.

Good ratio = 1:1

Cost of goods sold / average stock

or

Avg stock / cost of goods sold x 365

Number of times during a specific period that the avg inventory is sold.

Net profit before interest in tax / Capital employed

x 100

Find the value of the company that it gains from assets and liabilities.

Debtors / Sales revenue x 365

Measures how quickly cash is collected from debtors.

Creditors / sales revenue x 365

Measures how quickly cash is collected from creditors.

Net profit after interest and tax / Number of ordinary shares

Earnings returned on the initial investment amount.

Dividends per share / Market price of each share x 100

Annual percentage of return earned by an investor on a common/preferred stock.

Loan capital / capital employed x 100

A company's debt expressed as a percentage of its equity capital.

When a company overspends from its bank account.

Short-term liability b/c it needs to be paid quickly.