Comprehensive Report of Goodfellow PLC

This comprehensive report explores how investment appraisal techniques aid in decision making for Goodfellow PLC. It discusses the benefits and drawbacks of payback period, accounting rate of return, net present value, and internal rate of return. The report also includes the computation of cash inflow, payback period, ARR, NPV, and IRR. It concludes with an interpretation of the results and recommendations for investment decisions.

Comprehensive Report of Goodfellow PLC

TABLE OF CONTENTS
Presenting how investment appraisal techniques aid in decision making of the firm.................3
REFERENCES................................................................................................................................9

Presenting how investment appraisal techniques aid in decision making of the firm
On the basis of cited case situation, Goodfellow Plc, is planning to invest funds in the
development site with the motive to generate high margin. Hence, company is focusing on
building two types of house such as small and large. In this regard, by employing investment
appraisal tools manager of Goodfellow Plc would become able to assess the viability of proposed
project. For evaluating the viability of proposed project several tools have been applied such as
payback, net present value, average and internal rate of return.
Benefits and drawbacks of investment appraisal tools
Payback period: It implies for the length of time which firm will take for recovering its
initial outlay. This in turn helps in assessing time period after which firm will get profit margin.
Advantages
 Easily understandable and simple to calculate
 Helps in assessing risk associated with the proposal
 It gives high level of importance to liquidity aspect and helps in making decisions
pertaining to investment proposals (Payback period, 2018)
Disadvantages
 Payback method ignores time value of money concept
 It emphasizes on liquidity but ignores profitability factor
 In the case of payback period, after cash flow is not considered
Accounting rate of return (ARR): Such method refers to average rate of return which
proposed investment will offer. ARR helps in assessing returns which is expected on an
investment.
Advantages
 Such method recognizes the concepts of net earnings which in turn considered as main
factor for investment appraisal
 ARR method clearly exhibits the profitability of project (Accounting Rate of Return
(ARR) Method | Advantages | Disadvantages, 2018)

Disadvantages
 Time factor is completely ignored in ARR
 In ARR, fair rate of return cannot be assessed easily
Net present value (NPV): This method helps business unit in assessing return which it will
generate after the specified time period by taking into account the time value of money concept.
By deducting cash outflows from inflows return can be assessed in an appropriate manner.
Advantages
 NPV presents solution by taking into account time value of money concept.
 Such tool assists in maximizing firm’s value (Advantages and Disadvantages Of Net
Present Value, 2018)
 It gives high priority to risk and profitability while evaluating two projects
Disadvantages
 This method of investment appraisal cannot give accurate outcome or result in the case
of mutually exclusive project
 Difficult to use due to the inclusion of discounting factor
 NPV may not give accurate decision when life of projects are unequal
Internal rate of return (IRR): Such metric is used in capital budgeting for estimating
profitability associated with potential investment. IRR method clearly presents profitability in the
form of percentage and thereby helps in assessing the attractiveness of project.
Advantages
 IRR considers time value of money concept in the case of uneven cash flow as well
 At the time of calculation, profitability is considered throughout the life of project
 Helps in giving ranks to the projects and thereby assists in the selection of profitable
opportunities (Internal rate of return, 2018)
 It lays high level of emphasis on maximizing shareholders wealth
Disadvantages
 Such method involves tedious calculation

 IRR is difficult to calculate because it involves two discounting factor
Computation of cash inflow
Given that:
 Selling price will be increased by 3% per year according to inflationary trend
 Variable cost of construction inflation of 4.5% per annum.
 Fixed infrastructure costs of £3,000,000 per year and expected to be increased by
expected to be 2%
 Cost of capital: 12% per annum
Y
e
a
r
Nu
m
be
r
of
S
ma
ll
ho
us
es
sol
d
Nu
m
be
r
of
lar
ge
ho
us
es
sol
d
Se
lli
ng
Pr
ic
e
of
s
m
all
ho
us
e
S
ell
in
g
Pr
ice
of
la
rg
e
ho
us
e
Sal
es
rev
en
ue
of
Sm
all
Ho
use
Sal
es
rev
en
ue
of
lar
ge
Ho
use
Tot
al
sal
es
rev
en
ue
Var
iabl
e
cost
of
pro
duc
tion
(per
sma
ll
hou
se
)
Va
riab
le
cost
of
pro
duc
tion
(Pe
r
Lar
ge
hou
se
)
Vari
able
cost
of
cons
truc
tion
smal
l
hous
e
Vari
able
cost
of
cons
truc
tion
larg
e
hous
e
Tot
al
vari
able
cost
of
pro
duc
tion
Fi
xe
d
co
st
Tot
al
cos
t
Pro
fitab
ility
or
cash
inflo
w
1 30 14
40
00
00
70
00
00
120
000
00
980
000
0
218
000
00
200
000
400
000
6000
000
5600
000
116
000
00
30
00
00
0
146
000
00
7200
000
2 40 16
41
20
00
72
10
00
164
800
00
115
360
00
280
160
00
209
000
418
000
8360
000
6688
000
150
480
00
30
60
00
0
181
080
00
9908
000
3 30 30
42
43
60
74
26
30
127
308
00
222
789
00
350
097
00
218
405
436
810
6552
150
1310
4300
196
564
50
31
21
20
0
227
776
50
1223
2050
4 10 30
43
70
91
76
49
09
437
090
8
229
472
67
273
181
75
228
233.
225
456
466.
45
2282
332
1369
3993
.5
159
763
26
31
83
62
4
191
599
50
8158
225

Computation of payback period
Year
Profitability
or cash
inflow
Cumulative
cash inflow
1 7200000 7200000
2 9908000 17108000
3 12232050 29340050
4 8158225 37498275
Payback period
1 + (17108000 – 8000000) / 9908000
= 1.9 years or 1 year and 9 months
Calculation of ARR
Year
Profitabili
ty or cash
inflow
1 7200000
2 9908000
3 12232050
4 8158225
Average
profit 9374568.75
Average
investme
nt 8000000
ARR
Average
EAT /
average
investme
nt 117%

Computation of NPV
Yea
r Profitability or cash inflow
PV factor @
12%
Present value of cash
flows
1 7200000 0.89286 6428592
2 9908000 0.79719 7898558.5
3 12232050 0.71178 8706528.5
4 8158225 0.63552 5184715.3
Total discounted cash inflows 28218400
Less: initial investment 8000000
Net present value (TDCF –
II) 20218400
Calculation of IRR
Year
Profitabilit
y or cash
inflow
0 -8000000
1 7200000
2 9908000
3 12232050
4 8158225
IRR 102%

Interpretation of outcome: Results of investment appraisal presents that Goodfellow Plc
will recover amount of initial investment as of £8000000 within the period of 1 years and 9
months. Further, the above depicted table clearly exhibits that business unit will generate
positive and higher margin after the period of 4 years from such proposed developing site project
such as £20218400 respectively. Further, it has assessed from the evaluation that ARR associated
with such project is positive and accounted for 117% significantly. Along with this, IRR
associated with such project also implied for 102%. On the basis of selection criteria’s business
unit should select proposal which has less payback period and high NPV, ARR & IRR. Hence,
considering such aspect it can be entailed that such concerned developing site project pertaining
to small and large house proves to more fruitful or profitable for the firm. Thus, company is
advised in relation to investing money in such project.

REFERENCES
Online
Accounting Rate of Return (ARR) Method | Advantages | Disadvantages. 2018. [Online].
Available through: <https://accountlearning.com/accounting-rate-of-return-method-
advantages-disadvantages/>.
Advantages and Disadvantages Of Net Present Value. 2018. [Online]. Available through:
<https://accountlearning.blogspot.com/2011/07/advantages-and-disadvantages-of-net.html>.
Internal rate of return. 2018. [Online]. Available through:
<https://accountlearning.com/advantages-disadvantages-internal-rate-return-method/>.
Payback period. 2018. [Online]. Available through:
<https://efinancemanagement.com/investment-decisions/advantages-and-disadvantages-of-
payback-period>.