Topics: Net present value, Rate of return, Investment Pages: 7 (2154 words) Published: September 14, 2013
Financial management
Group assignment: Investment appraisal
Li Chen 08198937
Diane Oyaya 10222775
Words: 1548
Dr Francesca Gagliardi

Financial management assignment: Investment appraisal
Delta Plc. Manufactures motorcycles. They are trying to increase profit by investing into and new project to enter a racing team for a period of four years. The company has its expectations and in order to go ahead with the investment. The cost of capital for this investment is 15percent. The company set a target accounting rate of return on investment of 15percent and a payback period of three years or less for all projects. As external consultants we will be using different m and calculations to be able to determine whether this investment is worth going for and be able to make a general recommendation to the company. “One of the most important long-term decisions for any business relates to investment. Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/ building or other asset, which will then yield returns to an organisation over a period of time.”

Projected financial data for the project (£)

| Year 1| Year 2| Year 3| Year 4|
Additional sales revenue| --| 350,000| 390,000| 410,000| Operating costs| | | | |
Materials and components| (50,000)| (65,000)| (65,000)| (50,000)| Salaries and wages| (70,000)| (80,000)| (85,000)| (85,000)| Depreciation| (45,000)| (45,000)| (45,000)| (45,000)|

Advertising| (25,000)| (25,000)| (25,000)| (25,000)|
Overheads| (10,000)| (10,000)| (10,000)| (10,000)|
Profit (loss)| (200,000)| 125,000| 160,000| 195,000|

Here is the financial table of the project.
By using this table, we will be assessing the appraisal by carrying out some calculations for the methods, drawing some conclusions, developing a SWOT analysis for what we find and drawing a recommendation based on our findings as to whether or not the company should go with the investment And this will depend as to whether it will meet their targets and expectations. If the assessment proves satisfactory, the project will start immediately.

Payback period
The payback period formula is used to determine the length of time it will take to recoup the initial amount invested on a project or investment. The payback period formula is used for quick calculations and is generally not considered an end-all for evaluating whether to invest in a particular situation. ‘It is usually the default technique for smaller businesses and focuses on cash flow, not profit.’ ( The disadvantage of payback period is that it ignores the accounting time value of money. Calculations for Payback period:

Payback period=number of years before full recovery + money left to be recovered / Next year’s cash flows. Payback period =2+120,000/215,000=2.6 years
By looking at the results of the payback period of Delta plc. , it shows us that the project needs 2.6years to take back the cost. It cannot take back the cost for the first year, but it is well, so the invest risk is not very high. This payback period is better than what the company was aiming for, as they wanted a payback period of three years or less for all projects. So this shows positive and tells us that they should go ahead with the investment.

Net present value
Net present value is to evaluate the capital investment projects for using all cash flows. Net present value can reflect the investment profitability. It considers the time value of money, it increased the evaluation of the economic investment. It thinks over the cash flow, the result was unifying with the profitability. The disadvantage is the Net present value is hard to...
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