• April 4th, 2016

Investment appraisal and decision making

Paper, Order, or Assignment Requirements

Consider three mutually exclusive investment projects Alpha, Beta and Delta that your company is considering for investment (will be provided in additional files). The initial outlay at Year 0 and expected residual value at the end of 4 years, along with the expected cash flow each year will be provided in additional files. Using various investment appraisal techniques rank the 3 projects and comment on the feasibility of the investment option. State your preference for each project in line with the advantages and disadvantages of the each method used. Use appropriate in-text citation and referencing to justify your results.

Case Study

 

Investment appraisal and decision making

 

Consider three mutually exclusive investment projects Alpha, Beta and Delta that your company is considering for investment. The initial outlay at Year 0 and expected residual value at the end of 4 years, along with the expected cash flow each year is provided below. Using various investment appraisal techniques rank the 3 projects and comment on the feasibility of the investment option. State your preference for each project in line with the advantages and disadvantages of the each method used. Use appropriate in-text citation and referencing to justify your results.

 

  (Figures in $) Alpha Beta Delta
Project Investment outlay 5,000 8,000 10,000
Residual value (4yrs) 1,000 2,000 3,000
End of year cash flow
         Year 1 1,000 3,000 5,000
         Year 2 1,000 3,000 5,000
         Year 3 3,000 3,000 1,000
         Year 4 3,000 3,000 1,000
Total Profits 8,000 12,000 12,000

 

1) Rank the 3 projects using ARR method.

 

2) Considering the company’s historical ROCE to be at 25%. Which of the three projects are worth considering for investment?

 

3) Rank projects using Payback period method.

 

4) Considering company maximum acceptable Payback Period to be 3 years. Which of the 3 projects are worth considering for investment?

 

5) Rank projects using Net Present Value method. Consider discount rate of 5%.

 

6) Which of the 3 projects are worth considering for investment?

 

7) Rank projects using IRR method.

 

8) If the company’s required rate of return is at 15%. Which of the 3 projects are worth considering for investment?

 

9) Having evaluated the projects using alternative investment appraisal technique, provide an overall conclusion of the most appropriate method/methods you would consider for appraising the three projects and Why?

 

10) Provide a critical analysis of the appraisal methods used to evaluate projects and Justify your recommendation in light of the advantages and disadvantages of each of the method used to evaluate long term investment projects?

 

The requirements:

Investment appraisal techniques

[For each sub question provide the formulae. Show the calculations and the answer. Provide a brief explanation of what that estimation means and how that should be interpreted in the context of long term decision making for the business. Are there any shortcomings or limitations of the methods used and how does that affect your decision. Use appropriate in-text citations]

 

For question 1: Ranking projects using ARR method

 

For question 2: Projects feasibility as per ARR method

 

For question 3: Ranking projects using Payback method

 

For question 4: Projects feasibility as per Payback method

 

For question 5: Ranking projects using NPV method

 

For question 6: Projects feasibility as per NPV method

 

For question 7: Ranking projects using IRR method

 

For question 8: Projects feasibility as per IRR method

 

For question 9: Conclusion

[Of all the methods used to appraise the three projects provide a clear rationale for the most appropriate method you would consider for evaluating the three projects and Why? Justify your recommendation?]

 

For question 10: Critical Analysis of Investment Appraisal methods

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