Table of Contents

Introduction.

Question 3- Investment Appraisal Techniques.

A) Calculation.
a) The Payback Period.
b) Accounting Rate of Return.
c) The Net Present Value (NPV)
d) The Internal Rate of Return.
B) Critically evaluate the strengths and weaknesses of different investment appraisal techniques.

Strengths of the payback period.

Weaknesses of the payback period.

Benefits and limitations of ARR.

Benefits and limitations of NPV.

Benefits and limitations of IRR.

Question 2- Dividend Policy.

A) Planet’s Fair price of the share.
B) Calculate the new price for Planet’s share.
C) Outline any problems with using the dividend growth model as a way of valuing shares.

References.

Introduction

Financial Management refers to the organizing, planning, controlling and directing the different financial activities including utilization as well as procurement of the organizational funds (Davila, 2015). In addition, financial management means using different common management principles to the financial resources of a business organization. The key functions of financial management including the valuation of different capital requirements, determination of capital structure and share of the funds (Rees, 2015). Effective financial management helps a business organization to mobilize as well as promote both individual and corporate savings. In the current days, financial management is popularly identified as business finance or corporate finance. The business or corporate sector cannot function properly and effectively without financial management’s importance.

Question 3- Investment Appraisal techniques

Calculation

Different investment appraisal techniques including ARR (average rate of return), IRR (internal rate of return), NPV (net present value) and PP (payback period) are used by investors. In addition, investment appraisal is a significant factor for capital budgeting as well as is suitable to the areas where returns may not be quantifiable easily including training, marketing and personnel.

Lovewell Limited is the food manufacturing company that is considering buying a new machine worth £275,000. The yearly cash inflow of Lovewell Limited is £85,000 which is come from the sales of its products.

a) The Payback Period

Thus,

The costs of the project or investment= £275,000

Annual Cash Inflows= £85,000

So, the payback period is= (£275,000/£85,000)

= £3.235

The Payback Period is £3.235.

b) Accounting Rate of Return

This technique is expected to invest or an asset that is mainly related to the cost of the initial investment (Knight, 2015). In addition, ARR mainly divides average revenue by the initial investment of a company that usually originates a ratio that can be estimated as the lifetime asset or the related project.

Thus,

The average net profit= £85,000+£12,500= £97,500

Average investment is= £275,000

So, the ARR is= (£97,500/£275,000) = 0.35%

The ARR is 0.35%.

c) The Net Present Value (NPV)

Net present value (NPV) is an investment appraisal technique that is applied to determine the future cash flows’ current value is created by a project such as initial capital investment. In addition, NPV is mainly applied in the capital budgeting’ as well as ‘investment planning’ to investigate the profitability of a projected investment (Knight, 2015).

Thus,

The present value of cash inflows is= £85,000

The present value of cash outflow is= £12,500

So, the NPV is= (£85,000/£12,500) = £6.8

The NPV is £6.8

d) The Internal Rate of Return

This technique is used in ‘capital budgeting’ to assess the potential investments’ profitability (Knight, 2015). IRR is calculated in the following way:

Ct= £85,000

C0= £275,000

r= 15%=0.15

t= 6 years

So, the IRR is = {£85,000/(1+0.15)^6)}- £275,000

= (£85,000/2.3130)-£275,000

= 36748.811-275000

= -238251.19

B) Critically evaluate the strengths and weaknesses of different investment appraisal techniques

Strengths of payback period

It is easy to apply
It is a simple technique that is why investors can easily understand
Take a project which has a short payback period. On the other hand, the payback period has a number of practical and theoretical drawbacks.

Weaknesses of payback period

It ignores the time value of money
The other limitation of the payback period is cash flows are neglected by the payback period.
The key limitation or disadvantage of the payback period technique is it ignores the profitability of a project (Helfert, 2017)

Benefits and limitations of ARR

Strengths of ARR are:

An investor can generate an idea for further investment
It shows the traditional pattern of cash flow
A good measure of the profitability (Knight, 2015)

The key limitations of ARR are:

1 These techniques ignore the time value of money

2. The cash flow is highly ignored

3. IRR technique does not deliberate the terminal value of a project(Helfert, 2017)

Benefits and limitations of NPV

The key advantages of NPV are:

An investor can generate an idea for further investment
it shows the traditional pattern of cash flow
A good measure of the profitability

The key disadvantages of NPV are:

There is the estimation of the opportunity cost
It is difficult to determine the required rate of return (Rees, 2015)
It might not boost the EPS and ROE

Benefits and limitations of IRR

The key advantages of ARR are:

IRR mainly depends on the information of accounting.
IRR technique is the easy way to determine the proper calculation.
IRR technique is dependent on the accounting profit also. Thus, it measures the investment profitability (Davila, 2015)

The key limitations of IRR are:

This technique ignores the time value of money2. The cash flow is highly ignored3. IRR technique does not deliberate the terminal value of a project

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Accounting & Finance

APC308 Financial Management Assignment (GC01358)

Introduction