Importance of Capital Investment Appraisal Process for S plc

Business Report

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASKS.............................................................................................................................................3
Part A..........................................................................................................................................3
1) Description regarding importance of capital investment appraisal process...........................3
2) Preparation of cash flows for new investment........................................................................4
3) Determination of pay back period..........................................................................................4
4) Computation of net present value with comment...................................................................5
5) Stating the logic behind net present value approach accompanying their relationship with
cost of capital..............................................................................................................................5
7) Calculation of IRR with comment..........................................................................................6
8) Discussing why NPV is regarded to be superior to IRR........................................................6
Part B...........................................................................................................................................7
Critical contrast between long term finance available i.e., bank loan and equity issue..............7
Part C...........................................................................................................................................7
1) Calculation of break even sales revenue, sales revenue to achieve target profit of 120000
and margin of safety....................................................................................................................7
2) Consequences of increase/ decrease of price by 10%.............................................................8
3) Analysis of cost volume profit with assumptions and critical review on those......................9
Part D........................................................................................................................................10
1) Difference between categories of suppliers that are: strategic, preferred & transactional.. .10
2) Comparing advantages of single sourcing and multiple sourcing in context to procurement.
...................................................................................................................................................11
3) Description of cross sourcing with example and how it benefits the buyer.........................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Business report consists of data which provides past informative data related to
organization's manufacturing, operations, department's comprehension, etc. that creates base for
the company to make decisions for future. Hence, for this project report S plc has been selected
who wants to add a new line of computer games to their highly flourishing product range. So for
this purpose, following report will show about the importance of capital investment process, why
it is crucial for the company. Further, project report will also depict various calculations that
becomes necessary to compute before taking decision regarding adding a new product.
Subsequently, report will include the sources that firm can choose to carry on its business
operations together with forecasting the estimated cost, sales & profits that can be faced by
organization. After moving forward, firm will look into the different kinds of suppliers & select
the next best alternative for its business entity.
TASKS
Part A
1) Description regarding importance of capital investment appraisal process.
Capital investment appraisal is very crucial for business entity because this will involve
company's resources, so before taking any decision firm must carry on investment appraisal
process. Some points exhibiting importance of such are mentioned below:
 Financing the project: Before implementation of new business idea, company must first
analyse the initial investment that will be required along with additional capital, needed
for further carrying on the project (Baum, Crosby and Devaney, 2021). Therefore,
company will able to determine that available capital resources is sufficient or not and if
not, than from where to arrange the funds.
 Involvement of company's resources: As large amount of company's resources are
involved, it becomes necessary for organization to carefully evaluate the requirement of
resources, both in terms of financial, non-financial & human (Xu, Yu and Gupta, 2020).
Therefore, by this organization's resources will not be wasted and appropriate decisions
will be taken before initiating the project.
 Determines if project will fit to the strategy made or not: Investment appraisal along
with demonstrating project's financial feasibility, they also help company in determining

that whether project made is moving exactly in the direction of strategy made or not
(Bateman, and Mace, 2020). Apart this, this process aid the company in preparing new
plan of action if it does not matches with the previous one.
 Maximization of shareholder's wealth: Introduction & implementation of project must
be such that, decisions taken regarding investment will fulfil the criteria regarding
maximizing shareholder's wealth. Furthermore, company will also look that firms desired
long term objectives are also achieved with this project.
2) Preparation of cash flows for new investment.
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Sales revenue (in £) 600 1000 1200 1000 800
Less: Cost of sales (in £) 180 300 360 300 240
Gross profit 420 700 840 700 560
Less: Expenses
Incremental operation costs (in £) 100 100 100 100 100
Depreciation 260 260 260 260 260
Net profit 60 340 480 340 200
Add: Depreciation 260 260 260 260 260
Cash flows 320 600 740 600 460
3) Determination of pay back period.
Particulars Year Cash inflows
Cumulative cash
inflows
1 320 320
2 600 920