# Simplified Investment Appraisal and Working Capital

# ACCA FM Key Topics Simplified

## 1. Investment Appraisal

**What It Is:** Investment appraisal involves evaluating potential investment projects to determine their financial viability. This includes assessing the expected returns, risks, and overall impact on the organisation.

### Key Concepts:

**Net Present Value (NPV):**The difference between the present value of cash inflows and outflows. A positive NPV indicates a good investment.**Internal Rate of Return (IRR):**The discount rate that makes the NPV of an investment zero. A higher IRR than the cost of capital suggests a good investment.**Payback Period:**The time it takes for an investment to generate cash flows sufficient to recover the initial investment cost.

### Example:

**NPV Calculation:** Suppose a project requires an initial investment of £100,000 and is expected to generate £30,000 annually for 5 years. If the discount rate is 10%, the NPV can be calculated as follows:

- NPV = £30,000 / (1+0.10)^1 + £30,000 / (1+0.10)^2 + £30,000 / (1+0.10)^3 + £30,000 / (1+0.10)^4 + £30,000 / (1+0.10)^5 - £100,000
- NPV = £24,545 + £22,314 + £20,285 + £18,441 + £16,764 - £100,000
- NPV = £2,349 (Positive NPV, so the investment is viable)

## 2. Working Capital Management

**What It Is:** Working capital management involves managing the short-term assets and liabilities of a company to ensure it can meet its short-term obligations and operate efficiently.

### Key Concepts:

**Current Ratio:**Measures the ability of a company to pay its short-term liabilities with its short-term assets. Calculated as Current Assets / Current Liabilities.**Quick Ratio:**Similar to the current ratio but excludes inventory from current assets. Calculated as (Current Assets - Inventory) / Current Liabilities.**Cash Conversion Cycle:**The time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

### Example:

**Current Ratio Calculation:** Suppose a company has current assets of £150,000 and current liabilities of £100,000.

- Current Ratio = £150,000 / £100,000 = 1.5 (Indicates the company has £1.50 in current assets for every £1 of current liabilities)