APC 308 Financial Management

APC 308 Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 2........................................................................................................................................3
(a) Investment appraisal technique..............................................................................................3
(b) Critical evaluation of the effect of Directors proposal on the company................................6
(c) Advantage and disadvantage of investment appraisal technique...........................................7
Question 3........................................................................................................................................9
(a) Valuation of company using Price/earnings ratio..................................................................9
(b) Valuation of company using Discounted cash flow method................................................10
(c) Valuation of company using dividend valuation method.....................................................10
(d) Problems with valuation method and recommended method..............................................11
CONCLUSION..............................................................................................................................13
REFERENCES................................................................................................................................1

INTRODUCTION
Financial management is the most crucial for the company and need proper attention of the
line managers because it affects the overall operational and financial performance of the
company (Sugeng and Suryani, 2018). The report will address the different investment appraisal
technique advantage and disadvantage after calculation of investment proposal.
MAIN BODY
Question 2
(a) Investment appraisal technique
i) Calculation of Pay Back Period
Time (in years) Cash outflow Cash inflow (after
deducting net cash
outflow)
Cumulative cash flow
0 (438700) (438700)
1 25500 97500
(123000 - 25500)
97500
2 25500 97500
(123000 - 25500)
195000
3 25500 97500
(123000 - 25500)
292500
4 25500 97500
(123000 - 25500)
390000
5 25500 97500
(123000 - 25500)
487500
6 25500 97500
(123000 - 25500)
585000
Formula to calculate Pay back period: Initial investment/ cash flow per year
= 438700/ 97500 = 4.5 years i.e., the company will receive its initial investment in 4-year
5 month.

ii) Calculation of Accounting Rate of Return
Formula of average rate of return = Average Annual Profit/ Average Investment* 100
Step 1 Calculation of Average Annual Profit
Particulars Details Amounts (£)
Cash Inflow 123000* 6 738000
Less Cash Outflow 25500* 6 (153000)
Less Depreciation 62149.17* 6 (372895.02)
Total Profit 212104.98
Average annual profit 212104.98/ 6 35350.83
*Calculation of annual depreciation = (Cost of assets – residual value)/ useful life
= (438700 - 65805)/ 6 = 62149.17 approx. is annual depreciation
Residual value is the 15% of the original cost of the asset i.e., 438700* 15/100 = 65805
Step 2 Calculation of Average Investment
(Initial Investment + Residual value at the end of useful life)/ 2
= (438700 + 65805)/ 2
= 252252.5
Step 3 Calculation of ARR* 100
Average Annual Profit/ Average Investment
= 35350.83/ 252252.5* 100
=14.01%
The average rate of return is 14.01% which is high than the IRR because this method does not
consider the time value of money. That why considering the ARR method for decision making is
not at all beneficial to the company. It is because present value of cash flows plays major role
and affects the company decision regarding whether to invest in the specific proposal or not
(Umar, Usman and Purba, 2018).
iii) Calculation of Net present Value