Business finance | Question and Answer

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Business finance

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Table of Contents
Question 1..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................3
c).............................................................................................................................................4
d)............................................................................................................................................4
Question 2..................................................................................................................................4
References..................................................................................................................................6

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Question 1
a)
The investment appraisal techniques are used to make the decision in relation to any project
and for that various criteria are specified which are discussed below:
Payback period: Under this, the acceptance will be made if the payback period is less than the
maximum acceptable duration of the payback period. In the case of a higher payback period
the project will be rejected (Gorshkov et al., 2018). The demerit is that it does not consider
the returns and the time value of money in calculations.
IRR: The IRR is the rate at which NPV will be zero and so if the IRR will be higher than the
cost of capital then the acceptance will be provided otherwise the project will be rejected.
Under these various important factors are ignored such as future cost, and project size and
that is the main limitation with the method.
Profitability Index: The acceptance of the proposal will be made when the PI will be higher
than 1 and at 1 the company will be indifferent whereas if the PI will be lesser than 1 then the
rejection will be made. The process of determining the rate of return under this approach is
difficult and the projections which are made are optimistic which makes this approach less
viable.
Net present value: This will be used for the evaluation and with positive NPV the project will
be considered and in case of negative NPV the rejection of the project will be done. The
sensitivity which is involved in relation to the discount rate is its main disadvantage. If the
incorrect rate will be chosen then the whole process will prove to be incorrect and the
decision will not be considered reliable.
b)
In the application of investment rules, various difficulties will be faced and the most
important is to make the reliable projection of cash flows. There is the use of a discount rate
and it is not easy to ascertain the same. The whole calculation is based on the assumptions
and so it is difficult to place complete reliance on them. In case of wrong estimates, the
complete rule will fail and no correct decision will be undertaken.