Finance
Domain focus
Finance in CICT tests time value of money, capital budgeting, working capital, sources of finance and basic ratio interpretation for decisions.
Core rules and concepts
- Money has a time value: future cash flows are discounted at the cost of capital. Present value = cash flow ÷ (1 + r)^n for a single flow.
- NPV = present value of cash inflows minus initial outlay. Accept a project with positive NPV; among mutually exclusive projects, choose the highest positive NPV.
- Payback measures liquidity recovery, not profitability. IRR is the discount rate giving zero NPV; it can mislead when project scales differ.
- Working capital = current assets − current liabilities. Manage inventory, receivables and payables without damaging operations.
- Financing mix matters: debt is cheaper before tax but adds fixed interest and default risk; equity shares risk but dilutes control.
Worked example
A project costs 100,000 and returns 60,000 at the end of each of two years. At 10%, PV = 60,000/1.10 + 60,000/1.10^2 = 54,545 + 49,587 = 104,132. NPV = 104,132 − 100,000 = +4,132. Accept, subject to risk and qualitative review.
Traps
Do not discount cash flows at the accounting profit margin. Do not ignore working-capital recovery or tax. A positive payback does not prove value creation; a high IRR on a tiny project may add less wealth than a lower IRR on a large one.