Managing Financial Resources and Decisions

Running head: MANAGING FINANCIAL RESOURCES AND DECISION
Managing Financial Resources and
Decisions

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Table of Contents
An explanation of each of the following capital investment appraisal techniques..........................3
Calculate the four investment options using the above capital investment appraisal techniques.
Appraise the results and include an explanation of which discount rate was used and why...........5
An outline of the potential risks involved with this project, and an explanation of their likely
impact............................................................................................................................................11
A summary of possible sources of funding for the project, outlining the advantages and
disadvantages of each....................................................................................................................14
Bibliography..................................................................................................................................17
Appendices....................................................................................................................................19

MANAGING FINANCIAL RESOURCES AND DECISIONS
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An explanation of each of the following capital investment appraisal techniques
Investment appraisal techniques are used to assess the feasibility of projects in terms of long-
term investment. This technique can be practiced by PNJ Ltd to assess new projects by using the
cash flow of projects and their present value. There is a certain technique of investment appraisal
to assess the appropriateness of projects such as NPV, IRR, ARR, and Payback period.1
Payback Period Method
Payback period is a significant criterion for choosing the project. It defines the length of time
required for recovering the cost of investment. A project can be selected while the value of PBP
is below and equal to the expectation of management. After Payback period, a company can start
to get earning profits.2
The given formula is used to calculate the Payback period.
Payback Period Method =n+ ( initial investment – a the mount of cash flows )
cash inflow∈next year
Internal Rate of Return (IRR):
The internal rate of return is the interest rate at which net present value of all cash flows (both
favorable and unfavorable) from an investment equal to zero. In addition, the internal rate of
return is implemented to assess the attractiveness of the investment. The company can invest in a
1 Fadi Alkaraan, ‘Strategic investment decision-making–Scanning and screening investment opportunities: The
expansion of Guinness in West Africa’ (2016) 24 (4) Meditari Accountancy Research 505-526.
2 A Bogoviz and S. Mezhov, ‘Models and tools for research of innovation processes’ (2015) 9 (3) Modern Applied
Science 159.

MANAGING FINANCIAL RESOURCES AND DECISIONS
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project only when the cost of capital would be higher than the IRR.3 The given formula would be
used to calculate the IRR:
IRR=Lowerrate+ NPVatlowerrate
NPVatlowerrate−NPVatupperrate × ( Hig h errate−Lowerrate )
Net Present Value Method
Net present value can be illustrated as the differentiation between total PV of cash inflows and its
initial outlays. It indicates the value that investment will add to the business of a company. It also
defines the potential profits that a project will obtain. The decision will be made on the basis of
the favorable and unfavorable value of the project. In case, a project has a positive value of NPV
then it could be selected by the company. In addition to this, in the case of two or more projects,
the choice of project will rely on a higher positive value of NPV.4
The given formula is used to assess the net present value of the project:
NPV=Total Present Value of Cash Inflows-Initial Investment
Accounting rate of return
The accounting rate of return technique assesses the return created from the average net income
projected for each of the years. In addition, the proposed capital investment is expected to be
practiced in the operations.5
The given below formula is used to calculate the accounting rate of return:
3 Ming-Gao Dong and Shou-Yi Li, ‘Project investment decision making with fuzzy information: A literature review
of methodologies based on taxonomy’ (2016) 30 (6) Journal of Intelligent & Fuzzy Systems 3239-3252.
4 Timothy J Foxon, Catherine SE Bale, Jonathan Busch, Ruth Bush, Stephen Hall, and Katy Roelich, ‘Low carbon
infrastructure investment: extending business models for sustainability’ (2015) 2 (1) Infrastructure Complexity 4.
5 Anthony Paul Higham, Chris Fortune, and J. C. Boothman, ‘Sustainability and investment appraisal for housing
regeneration projects’ (2016) 34 (2)Structural Survey 150-167.

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ARR= AverageIncome
AverageInvestment
Calculate the four investment options using the above capital investment appraisal
techniques. Appraise the results and include an explanation of which discount rate was
used and why
Payback period
Payback Period (Project A)
Years Net Cash Flow (£’000) Cumulative cash Flow (£’000)
0 -100 -100
1 25 -75
2 24 -51
3 22 -29
4 10 -19
5 16 -3
5 20 17
Payback Period (Project B)
Years Net Cash Flow (£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
Payback Period (Project B)
Net Cash Flow (£’000) Cumulative cash Flow (£’000)
-150 -150
50 -100
40 -60
40 -20
10 -10
10 0
5 5

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Payback Period (Project C)
Years Net Cash Flow (£’000) Cumulative cash Flow (£’000)
0 -175 -175
1 50 -125
2 40 -85
3 50 -35
4 40 5
5 40 45
5 15 60
As per the above results, it can be stated that project D will be selected by PNJ Ltdas compared
to three different projects as it takes less period i.e. 3.5 years to recover the cost of projects and
starts to earn profits.
NPV
Net Present Value (Project A)
Years
Cash Flow
(£’000) PV factor@8% PV of cash flow (£’000)
0 -100 1.000 -100
1 25 0.926 23.148
2 24 0.857 20.576
3 22 0.794 17.464
4 10 0.735 7.350
5 16 0.681 10.889
5 20 0.681 13.612
Total present value
of cash flow -6.96
Net Present Value -6.96