APC308 Financial Management: Investment Appraisal Techniques and Merger & Takeovers

APC308 FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
QUESTION 2 - INVESTMENT APPRAISAL TECHNIQUES.....................................................1
a) Calculating investment appraisal techniques...........................................................................1
b) Critically evaluating the effects of new proposal on company...............................................4
c) Critical evaluation of benefits and limitation of various investment appraisal technique.......5
QUESTION 3- MERGER AND TAKEOVERS.............................................................................6
a) Price/ earnings ratio.................................................................................................................6
b) Discounted cash flow method.................................................................................................7
c) Dividend valuation method.....................................................................................................8
d) Evaluation of various techniques of valuation and recommending one method to the board.8
REFERENCES..............................................................................................................................11

QUESTION 2 - INVESTMENT APPRAISAL TECHNIQUES
a) Calculating investment appraisal techniques
year cash inflows Cash outflow depreciation EBIT
net cash
inflow
1 223,600 32700 83342.5 107,558 190,900
2 223,600 32700 83342.5 107,558 190,900
3 223,600 32700 83342.5 107,558 190,900
4 223,600 32700 83342.5 107,558 190,900
5 223,600 32700 83342.5 107,558 190,900
6 223,600 32700 83342.5 107,558 190,900
i) Payback period
Year
Cash flows of System
A Cumulative cash flows
1 190900 190900
2 190900 381800
3 190900 572700
4 190900 763600
5 190900 954500
6 190900 1145400
Payback period 3
0.1
Payback period 3 year and 1 months
From the evaluation of the given payback period which helps in evaluating that how
effectively Super Tasty Soup (STS) Limited can cover its initial investment capital so that
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accomplishing objective of having higher profitability. New machinery will become able to
cover initial investment in 3 years 1 month.
ii) Accounting rate of return
Year Cash inflows
1 190900
2 190900
3 190900
4 190900
5 190900
6 190900
Average profit or cash inflow 190900
Average initial investment 294,150
average initial investment [(initial
investment + scrap value) / 2]
ARR 65%
The accounting rate of return allows to estimate the potential profitability of long term
investment over a period of time. From the analysis of the calculated figure it can be analysed
that machinery has potential to offer the profitability of 65%which is indicating positive sign of
particular investment. On the basis of this, it can be specified that particular project in terms of
profitability will be beneficial for the organization.
iii) Net present value
year
cash
inflows PV factor @ 10%
Discounted cash
flows
1 190900 0.91 173545
2 190900 0.83 157769
3 190900 0.75 143426
4 190900 0.68 130387
2