Capital Budgeting Methods on Different Project

FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
Question 1........................................................................................................................................4
(a) Project evaluation...................................................................................................................4
(b) Project risks and their impact on calculation..........................................................................9
(c) Importance of present value concept......................................................................................9
Question 2......................................................................................................................................10
(a) Ratio analysis.......................................................................................................................10
(b) Information needs of stakeholders.......................................................................................11
(c) Evaluation of use of ratio analysis........................................................................................11
Question 3......................................................................................................................................12
(a) Compute contribution, sales volume and sales value needed for break even......................12
(b) Calculation of profit and margin of safety...........................................................................13
(c) Advantage and disadvantage of cost profile of two products...............................................13
(d) Benefits of contribution analysis and cost volume profit analysis.......................................14
Conclusion.....................................................................................................................................14
REFERENCES..............................................................................................................................15

LIST OF TABLES
Table 1: Calculation of payback period method.............................................................4
Table 2: Calculation of NPV....................................................................................4
Table 3: Calculation of IRR.....................................................................................5
Table 4: Discounted payback....................................................................................5
Table 5: Calculation of payback period.......................................................................6
Table 6: Calculation of NPV....................................................................................6
Table 7: Calculation of IRR.....................................................................................6
Table 8: Discounted payback period...........................................................................7
Table 9: Calculation of payback period.......................................................................7
Table 10: Calculation of NPV...................................................................................8
Table 11: Calculation of IRR....................................................................................8
Table 12: Calculation of discounted payback period.......................................................8
Table 13: Ratio analysis of Morrison..........................................................................9
Table 14: Computation of breakeven analysis.............................................................11
Table 15: Computation of profit and margin of safety...................................................12

INTRODUCTION
Finance is the most difficult aspect to be managed within business. All the investments
are to be analyzed in a proper manner so that sound decisions can be made. The present report is
about application of different capital budgeting methods on different project options. It also
shows calculation of financial ratios in order to assess the financial performance of Morrison
PLC. The needs of different stakeholders with respect to business will also be identified and
evaluated.
QUESTION 1
(a) Project evaluation
Investment 1
Table 1: Calculation of payback period method
Initial investment
-
150000
1 100000 -50000
2 150000 100000
3 200000 300000
4 225000 525000
5 250000 775000
Interpretation
It is a tool which reflects the time period that the project will take to cover investment
amount (Petzke, Fuller and Metges, 2010). From the table given above, it is clear that investment
will be covered within a year.
Table 2: Calculation of NPV
Initial investment 150000
1 100000 0.909091 90909.09
2 150000 0.909091 136363.6
3 200000 0.909091 181818.2
4 225000 0.909091 204545.5
5 250000 0.909091 227272.7