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Financial Management Sample for Students

University: University of London

  • Unit No: 12
  • Level: High school
  • Pages: 11 / Words 2631
  • Paper Type: Assignment
  • Course Code: APC308
  • Downloads: 438

Table of Content

  1. INTRODUCTION
  2. CONCLUSION
Question :

This sample will let you know about:

  • What is Financial management ?
  • Explain Calculations for ARR.
  • Explain Net Present Value.
      Answer :
      Organization Selected : N/A

      INTRODUCTION

      Investment Appraisal Techniques

      Investment appraisal techniques to identify the feasibility of investments in project. Investment appraisal techniques are used for identifying attractiveness of investment. Motive behind the investment appraisals is of assessing project viability, portfolio or the programme decision and the values that they could generate. There are two kind of investment appraisal techniques that are discounted and the undiscounted. Difference is based on the concept of time value of money. That help the organisation to analyse in prior whether it will be beneficial or not for the company to accept the project (Sinha and Datta, 2020). The investment appraisal techniques mainly used by experts are net present value, internal rate of return, payback period and accounting rate of return. Lowell proposes to purchase a new machine for increasing the efficiency of company in producing the food products. Cost of machine is £275,000 and it will be generating cash inflows of £85000 with an cash outflow £12500 for continuous 6 years. Machine will be depreciated using the straight line method. It has given cost of capital to be 12%.Need Assignment Examples?Talk to our Experts!

      Feasibility of project using various investment appraisal techniques.

      Payback Period

      Payback period means the time taken by the investment to recover its initial cost. It is also defined as the period within which investment will reach point of its break even. Investment's desirability is related directly with the payback periods. Shorter the period more profitable is the investment for company. It is used by managers and investors for making quick decisions for investments. The concept is used mainly in capital and financial budgeting. It is also used for determining the cost saved from energy efficient technologies. Financial management is concerned with evaluating the values of different investment technique. Most of the appraisal techniques take into account time value of money. That gives the analysts the worth of money that will be generated by company in future (Awojobi and Jenkins, 2016). Time value is taken into account for having the concerns related to the opportunity cost. But payback period disregard the concept of time value.

      Calculations for payback period

      Years

      Cash inflows

      Cumulative Cash Flows

      1

      72500

      72500

      2

      72500

      145000

      3

      72500

      217500

      4

      72500

      290000

      5

      72500

      362500

      6

      72500

      435000

       

       

      3

      Initial Investment

       

      275000

       

       

      0.9

      Payback period

       

      3.9 Years

      Working Notes :

      Initial investment = 275000

      Cash flow = Inflow- outflow

      = 85000-12500

      = 72500

      Payback period = 275000/72500

      = 3.9 years.

      Recommendations

      Payback period of the machine show that the initial cost will be recovered in 3 years 9 months. Seeing the cost of machine the time period is not very high in which the costs are recovered. Though the time period is not very short but the costs will be covered before the useful life of the machine. Since the cash flows will recover the costs of machine it could be said that the investments is attractive and should be adopted by the company. Break even point is reached by company so the company will generate generate profits after covering the cost.

      Accounting Rate of Return

      It is return expected from the investments or project in percentage terms. It divides revenues average from the project by the initial investment made for deriving the ration which is expected from the assets over its life time. The concept does not takes into account time value of money that is an integral part of the business. It is another technique used in capital budgeting for checking the profitability of investment. It is mainly used for making comparisons between more than two projects. It factors for the expense of depreciation associated with assets. Depreciation is an accounting process that is required to be considered in the feasibility of asset (Ogunbayo and et.al., 2019). It is used by experts to assess whether the returns from investments are adequate or not.

      Calculations for ARR

      Particulars

      Amount

      Cost of machine

      275000

      Less- Scrap value (15% of cost of machine)

      41250

       

      233750

      Depreciation = Cost of assets - Scrap value / Life of machinery

      Depreciation = 233750 / 6

      = 33958.33

      Net Cash Flows

      Computation of Average rate of return

       

       

      Year

      Cash inflows

       

       

      1

      33541.67

      2

      33541.67

      3

      33541.67

      4

      33541.67

      5

      33541.67

      6

      33541.67

       

       

      Average profit or cash inflow

      33541.67

      Average initial investment

      275000

      average initial investment [(initial investment + scrap value) / 2]

       

      ARR

      (=33541.67 / 275000*100)

      12.19%

      Recommendations

      Accounting rate of return shows that the company should make investments for the machine. The statement is based on the accounting rate calculated by the expert for the given machine project. Machine is costing 275000 with the useful life of 6 years. During he useful life it it will be generating adequate rate of return that will be providing company with enough cash flows to recover the cost of investment and with profits on time. Every company makes investment for increasing the profitability and having a sustainable growth. It is essential for the business enterprise to ensure that the return is adequate. Project should be accepted by the company based on the results generated by the accounting return as the return of 12.19% is appropriate as per the other projects of industry.Order assignment help from our experts!

      Net Present Value

      NPV is the present worth of money that will be flowing to company from an investment or project over its entire life. It is a type of intrinsic valuations that are used extensively in financing and accounting decisions by the company. It is important for determining the values of investments, projects and business involving the cash flows. It is an investments appraisals technique highly used by organisations for determining the feasibility of investments. It is all encompassing metrics as all the expenses, revenues and the capital cost related with investments are considered in its cash flows. The cash flows are discounted by the cost of capital associated with the project (Warren and Seal, 2018). The profitability of the investments is identified using this technique project is considered profitable if the net present value left after recovering initial investment costs is positive.

       

      Computation of NPV

       

       

       

       

       

      Year

      Cash inflows

      PV factor @ 12%

      Discounted cash inflows

       

       

       

       

      1

      72500

      0.893

      64732.14

      2

      72500

      0.797

      57797

      3

      72500

      0.712

      51604

      4

      72500

      0.636

      46075

      5

      72500

      0.567

      41138

      6

      41250+72500

      0.507

      57629

       

       

       

       

      Total discounted cash inflow

       

       

      318976

      Initial investment

       

       

      275000

      NPV (Total discounted cash inflows - initial investment)

       

       

      43976

      (=318976-275000)

      Recommendations

      The NPV of the project is positive and is valued at 43976. The project seems to be feasible from this approach of capital budgeting. Positive NPV represents that the project will be profitable for the company and should be adopted. It represent that the present value after discounting the future cash flows is coming to 318976 during the useful life of asset where the cost of machine is 275000. This shows that project will generate profits after considering its initial cost of the investments. The method has considered the residual value of machine in its cash flows. This approach also recommends for accepting the machine and should be installed for manufacturing the food products. The cash flows have been discounted taking cost of capital of 12% as the discounting rate.

      Internal Rate of Return

      It is a discount rate which makes Net present value of the project to zero. It is also referred as the expected compounded annual rate of return from the project or investment. The project is considered profitable if the rate of return on investment is high (Elmassri, Harris and Carter, 2016). It could also defined as growth rate expected from an investments.

      Calculations for IRR

      IRR = Lower discounted rate + NPV at lower discount rate NPV at lower discount rate- NPV at higher discount rate) * Higher discount rate- lower discount rate

      Working notes:

      Net present value @ 12%

      Net present value = 297828-275000

      = £22828

      Net present value @ 18%.

      Net present value = 253576-275000

      = -£21424

      Recommendations

      The IRR from the project will be 15.07 % or 15% approx. This shows that the project will b generating enough returns to cover the cost along with the profits. The rate is high and it could be said that the project should be accepted by company.

      Advantages and dis-advantages of investment appraisals techniques

      Payback period

      Advantages

      • Projects are ranked on the basis of merits.
      • It is considerably simple and easy method to calculate.
      • The method proves to be more useful when the project involves uncertainty.

      Dis-advantages

      • The method overlooks cost of capital or the interest factor that is important in decision making.'
      • It does not have any rational basis to determine acceptable minimum pay back period.

      Accounting Rate of Return

      Advantages

      • ARR is straightforward and simple to compute.
      • It focuses over accounting the net operating income (Awojobi and Jenkins, 2016).
      • It also allows comparison of new project with that of the reducing one.
      • Accounting rate of return is also used for evaluation he performance of management.

      Dis-advantages

      • Concept of time of money is ignored by this technique.
      • Rate of return does not remains constant during the useful life of assets.

      Net Present Value

      Advantages
      • NPV takes into account the time value of money.
      • This tools accepts patterns of conventional cash flow.
      • Discounting rates considers the factors of risks.

      Dis-advantages

      • It is difficult to determine the opportunity cost or the rate at which project will be discounted.
      • Higher NPV of short term projects may not boost the return over equity of company.

      IRR

      Advantages

      • The tool considers the time value even when cash flows are uneven or even.
      • It is considers profitability of investment throughout the economic life of project that helps in evaluating true profitability of project.
      • Pre determinations of cost of capital is not required (Udoudo, 2017).Order Dissertation Help from our experts!

      Dis-advantages

      • The concept involves tedious calculations for IRR.
      • It focuses only over profitably and not on recouping the capital expenditures.

      CONCLUSION

      The project's positive NPV of $43,976 concludes that it is feasible and has the potential to be profitable. The project promises continued profitability with a present value of $318,976 during the asset's useful life compared to an initial cost of $275,000. Additionally, this technique highly advises adopting and installing the machine for the production of food products when taking into account the residual machine value in cash flows. Using a discount rate of 12%, this choice is both favourable and sound from a financial standpoint.

      Read also -Applied Corporate Strategy for Business

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