I85PREP
⌘ K
PAU Balearic Islands Business & Business Model Design (UIB) study materials
PAU Balearic Islands Business & Business Model Design (UIB) study resources

PAU Balearic Islands Business & Business Model Design (UIB): Financial Management and Investment Appraisal

PAU Balearic Islands Business & Business Model Design (UIB) · Work through your exam, one topic at a time.

All guide sections

Financial Management and Investment Appraisal

Domain 7 combines financing decisions, cost and profitability analysis, and project appraisal. Expect a numerical exercise - break-even, a profitability ratio, or NPV and payback - plus a short justification of the financing choice.

Sources of finance

  • Internal (retained earnings, asset sales) vs external.
  • Own funds/equity (capital, capital increase, business angels, venture capital, crowdfunding) vs borrowed funds (bank loan, leasing, confirming, bonds).
  • Criteria: cost, maturity, control dilution, guarantee requirements, risk. Short-term finance covers working capital; long-term finance covers investment.

Costs and profitability

  • Fixed vs variable; direct vs indirect; contribution margin = price − variable cost per unit.
  • Break-even units = fixed costs ÷ contribution margin per unit. Operating leverage rises with the fixed-cost share.
  • Margins: gross, operating, net. ROA = profit ÷ total assets; ROE = profit ÷ equity.

Financial statements

  • Balance sheet: assets = liabilities + equity. Income statement: revenue − expenses = result, on an accrual basis. Cash-flow statement: actual movements of cash.
  • Working capital = current assets − current liabilities.

Investment appraisal

  • NPV, IRR, payback, discounted payback, profitability index.
  • Discount only incremental cash flows, at a rate reflecting risk (WACC); depreciation is not a cash flow.

Worked example

Investment €100,000; cash flows €40,000 (year 1), €45,000 (year 2), €35,000 (year 3); discount rate 8%. Discounted: 37,037 + 38,580 + 27,784 = €103,401, so NPV = +€3,401 > 0: accept. Payback: cumulative 40,000 → 85,000 → 120,000, so payback falls in year 3 needing 15,000 of the 35,000, that is 2.43 years. Reasoning: NPV and payback agree here, but NPV is the decision rule because it accounts for the time value of money and all cash flows.

Traps

  • Using accounting profit where cash flow is required.
  • Taking the shortest payback as automatically the best project.
  • Comparing IRR with the wrong benchmark (it must exceed the discount rate).
  • Discounting nominal cash flows at a real rate.