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CIMA P2 · Management Level

B. Capital investment decision making

Master capital investment decision-making by exploring NPV, IRR, and risk-adjusted appraisal techniques to evaluate strategic investments and align them with organisational objectives. Develop competency in relevant cash flow analysis, project appraisal methodologies, and pricing strategies to support effective capital allocation decisions.

  • 37 lessons
  • 4 modules
  • 6.3h of video
  • ~35% of the exam
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What you'll learn

By the end of B. Capital investment decision making.

  • Explain the capital investment decision-making process and identify relevant cash flows for project appraisal
  • Apply discounted cash flow techniques including NPV and IRR to evaluate long-term investment opportunities
  • Analyse and compare project appraisal methodologies, including modified internal rate of return and equivalent annual costs
  • Evaluate capital rationing scenarios and prioritise investments under resource constraints
  • Apply pricing strategies based on cost and market considerations to support capital investment decisions
  • Assess the impact of price elasticity of demand on investment pricing and financial outcomes

The lessons

37 lessons, module by module.

Data for decision making

6 lessons
  1. 1 Decision making process - part 1 9m
  2. 2 Decision making process - part 2 5m
  3. 3 Relevant cash flows 13m
  4. 4 Opportunity costs 3m
  5. 5 Sources of data 15m
  6. 6 Information analysis and presentation 8m

Project appraisal

15 lessons
  1. 1 Project appraisal - part 1 17m
  2. 2 Project appraisal - part 2 8m
  3. 3 Discounted cash flow techniques - part 1 12m
  4. 4 Discounted cash flow techniques - part 2 9m
  5. 5 Discounted cash flow techniques - part 3 13m
  6. 6 Discounted cash flow techniques - part 4 9m
  7. 7 Discounted cash flow techniques - part 5 6m
  8. 8 Net present value - part 1 11m
  9. 9 Net present value - part 2 7m
  10. 10 Internal rate of return - part 1 8m
  11. 11 Internal rate of return - part 2 10m
  12. 12 NPV: taxation, working capital, inflation - part 1 18m
  13. 13 NPV: taxation, working capital, inflation - part 2 13m
  14. 14 NPV: taxation, working capital, inflation - part 3 5m
  15. 15 NPV: taxation, working capital, inflation - part 4 14m

Further aspects of project appraisal

6 lessons
  1. 1 Modified internal rate of return 18m
  2. 2 Equivalent annual costs - part 1 11m
  3. 3 Equivalent annual costs - part 2 17m
  4. 4 Capital rationing - part 1 9m
  5. 5 Capital rationing - part 2 7m
  6. 6 Real options 11m

Pricing strategies

10 lessons
  1. 1 Price elasticity of demand 15m
  2. 2 Cost based pricing - part 1 9m
  3. 3 Cost based pricing - part 2 10m
  4. 4 Market based pricing - part 1 6m
  5. 5 Market based pricing - part 2 7m
  6. 6 Market based pricing - part 3 8m
  7. 7 Optimal pricing - part 1 9m
  8. 8 Optimal pricing - part 2 10m
  9. 9 Optimal pricing - part 3 9m
  10. 10 Optimal pricing - part 4 9m

Questions

About B. Capital investment decision making.

What does the Capital Investment Decision Making section cover?

This section covers the complete framework for evaluating long-term capital investments, including relevant cash flow identification, project appraisal methodologies, and discounted cash flow techniques such as NPV and IRR. It also explores risk-adjusted appraisal methods, capital rationing, and pricing strategies to support effective capital allocation decisions aligned with organisational objectives.

Is this section important for the P2 exam?

Yes, capital investment decision-making is a core component of the CIMA P2 exam. This section accounts for a significant portion of the assessment, with multiple objective test questions focusing on NPV calculations, IRR analysis, project appraisal methods, and pricing strategies. Mastering this content is essential for exam success.

What are relevant cash flows and why are they important?

Relevant cash flows are the incremental cash flows directly attributable to an investment decision, excluding sunk costs and accounting allocations. Understanding relevant cash flows is critical because they form the foundation of accurate project appraisal and ensure that capital investment decisions are based on economically sound information rather than accounting conventions.

What is the difference between NPV and IRR?

NPV (Net Present Value) measures the absolute value added by an investment in monetary terms by discounting all future cash flows at a required rate of return. IRR (Internal Rate of Return) expresses the return as a percentage rate at which NPV equals zero. NPV is generally preferred for capital investment decisions as it directly shows value creation and handles different project scales more effectively.

When should equivalent annual costs be used?

Equivalent annual costs (EAC) should be used when comparing projects with different economic lives or when making replacement decisions. EAC converts the total net present cost of a project into an equivalent annual charge, enabling fair comparison of projects that operate over different time periods and supporting capital rationing decisions.

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