Active learning ideas
Capital investment appraisal involves evaluating long-term projects that require significant capital outlay. Students learn to use the Payback Period and Net Present Value (NPV) methods. A key concept here is the 'time value of money', the idea that a dollar today is worth more than a dollar in the future. This is a fundamental principle in finance and is essential for students to understand how large-scale projects, like Singapore's infrastructure developments, are evaluated.
Activity 01
Students pitch a long-term investment project (e.g., opening a new branch or buying a delivery fleet) to a panel of 'investors.' They must present their NPV and Payback Period calculations and answer questions about their assumptions.
Why is the time value of money important in investment appraisal?
Activity 02
Groups are given $1,000 and two options: receive it now or in five years. They use different interest rates to calculate the 'present value' of the future cash and discuss how inflation and risk change their preference.
How does NPV compare to the Payback Period method?
Activity 03
Students individually list the strengths and weaknesses of the Payback Period method. They then pair up to discuss why a project with a fast payback might still be rejected if it has a negative NPV.
What qualitative factors should be considered before undertaking a major project?
A few notes on teaching this unit
Watch Out for These Misconceptions
The Payback Period method considers the total profitability of a project.
Payback only measures how quickly the initial investment is recovered; it ignores all cash flows that occur after the payback point. Peer comparison of two projects, one with fast payback but low total profit, and one with slow payback but high total profit, helps surface this error.
NPV and profit are the same thing.
Profit is an accounting measure based on accruals and depreciation, while NPV is based on actual cash flows and the time value of money. Using a 'cash flow vs. profit' timeline helps students see that NPV accounts for the timing of when money actually enters or leaves the bank.
Methods used in this brief
Relevant Information for Short-Term Decisions
Identify relevant costs and revenues for short-term decision-making scenarios. Apply relevant costing to make-or-buy, special order, and dropping a product line decisions.
8 methodologies
Budgeting and Variance Analysis
Understand the role of budgeting in planning and control. Calculate and interpret basic sales and cost variances to evaluate managerial performance.
8 methodologies