Foundation of Finance Investment Appraisal

The assignment content provides a brief overview of investment appraisal techniques used by the XYZ Company to select the best proposal among five given options. The main techniques employed are net present value, payback period, and profitability index. Based on these techniques, proposal D is found to be the most suitable option due to its highest NPV and acceptable payback period. However, it is recommended that the company should work towards improving its financial attractiveness, as all proposals have low profitability indices.

foundation of finance
INVESTMENT APPRAISAL

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The assignment will contain the various techniques which are employed in the investment
appraisal and will help the XYZ Company to select the best proposal among the given five
proposals. Further, the best-proposed project will be given so that the company can use in order
to attain the sustainable competitive advantage. Then the assumptions will be given further in the
assignment on which the decision will be based on the selection of the proposed project for the
XYZ Company.
The main techniques that are employed in investment appraisal
 Net present value
The net present value of an investment or the project shows the degree to which revenue or the
cash inflow exceeds or equals the amount of capital investment which is needed to fund it.
Further, the organizations use the net present value as a measure of comparing the profitability to
make sure that the most economic ventures are influenced. Also, the greater net present value
demonstrates the investment or the project is more profitable (Horngren et al., 2013). According
to the net present value, the proposal D will be more suitable and profitable for the XYZ
Company because the NPV is £726,487.4 which is much higher as compared to other four
proposals which have the values £150,092.2, £119,535.2, £126,759, £433,863.7 respectively.
Therefore, it can be clearly understood that on the basis of the net present value, proposal D will
help the XYZ Company in order to maximize the profitability and achieving the sustainable
competitive advantage.

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Figure 1
 Payback period
The payback period is defined as the length of the time which is needed in order to recover the
cost of the investment. Further, the payback period of the provided project or investment is the
significant determinant of whether to consider to project or not. Moreover, the payback periods
are not considered desirable for the positions of the investments. It completely ignores the value
of the money. The payback period doesn’t represent the exact image of the company when it
comes to appraising the project’s cash flows (Horngren et al., 2012). According to the result of
the payback period for the each proposal. It can be clearly said that the proposal A is the most
suitable one for the XYZ Company as compared to the other proposals because the value of the
payback period is 1.9 years. Further, the value of other proposals is 7 years, 3 years, 2 years and
3.5 years respectively. It can be clearly seen that there is no such difference between the values
of proposal A and proposal D. Therefore, the company XYZ can also use the proposal D instead
of proposal A.

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Figure 2
 Profitability index
The profitability index is defined as the index which tries to unfold the relationship among the
benefits and the costs of the proposed project. It is said that if the value of the profitability index
is lower than 1.0, then the company doesn't have the enough financial attractiveness towards the
proposed project (Weil et al., 2013). As we can see that the values of all the proposals which are
given in the table below are less than 0, which means that the proposed proposals don't have the
adequate financial attractiveness. But if we have to select one option among the given proposals
then the proposal E is more suitable as compared to other proposals as the value of profitability
index is 0.11 and the values of other proposals are 0.03, 0.0.2, 0.02, 0.023 respectively. It is
clearly observed that the company XYZ can use the proposal E in order to maximize the
profitability, but it can also use the proposal D in order to attain the sustainable competitive
advantage because anyhow the company has to work in order to improve their financial
attractiveness.

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Figure 3
Best proposed project that should be undertaken
Being an individual, in my opinion, proposal D is the most suitable one because it has the highest
net present value. As it is assumed that the proposal which has the greatest net present value
should be considered for the further operations of the company because it helps in achieving
sustainable competitive advantage. Further, the proposal D has the value of 2 years as the
payback period, and it has the acceptable profitability index to some extent. Therefore, the
company XYZ has to put some efforts in order to increase the financial attractiveness of the
company if they use proposal D in order to maximize the profitability and attaining the
sustainable competitive advantage for the longer period of time.

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Assumptions on which the decision is based
There are some assumptions on which the decision is based and are as follows:
 The company has the great brand image and the customer loyalty.
 The company has enough investors to maximize the financial attractiveness.
 The company offers product and services of good quality.

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REFERENCES
Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2013). Introduction to
management accounting. Pearson Higher Ed.
Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D., & Tan, R. (2012). Financial
Accounting. Pearson Higher Education AU.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.