Evaluation of Proposed Investment

Evaluation of Proposed Investment
ElectroServe PLC
Student Name

Table of Contents
Background..................................................................................................................................................2
Discussion and Analysis...............................................................................................................................2
Financial evaluation of the investment opportunity................................................................................2
Supporting documentation for evaluation of project..............................................................................3
Key limitations and qualitative issues on the analysis.............................................................................3
Recommendation to the Board of Directors............................................................................................4
Assumptions of the analysis....................................................................................................................4
References...................................................................................................................................................5

Background
A report has been prepared for the Board of Directors of the company ElectroServe Plc to indicate the
advantages of the investment opportunity that the company is foreseeing by launching a new artificially
intelligent model of robot named Model 2. The financial analysis has been done w.r.t. estimated sales
volume in 1st 5 years, the selling price, the related costs and cash flows during the period, The report
highlights the results of investment analysis like that of payback period, net present value and the
internal rate of return. The report also explains each of the line items considered and its treatment
along with the assumptions, if any. The limitations of the analysis and recommendation on the project
has been included towards the end (Arnott, et al., 2017).
Discussion and Analysis
Financial evaluation of the investment opportunity
In the given case, the company has used 3 different investment appraisal methods to analyze the
viability of the project namely the pay-back period, the net present value and the internal rate of return
techniques. The company did have intensive research on the project earlier, post which it was concluded
that it is feasible enough to be done. However, the results of financial analysis are explained below:
1. Payback Period: It shows the time period taken by the project to recover the initial investment.
As per the policy of the company, it should not exceed 3 years. The shortcoming of this method
is that it does not considers inflation as well as the cash flows beyond the pay-back period and is
therefore less reliable. As per the results shown in appendices, the net cash flows become
positive by the end of the 2nd year and so the Payback period is nearly 1 year 4 months and
therefore the project is acceptable (Visinescu, et al., 2017). For the purpose of calculation, it has
been assumed that the cash flows are evenly distributed throughout the year.
2. Net Present Value: This is one of the best methods considered for project evaluation. It
considers the cash inflows and outflows over the period of time discounted at appropriate rate
of return to analyze the net inflow to the company. This method is the most reliable one as it
considers all the parameters like inflation, working capital, risk, opportunity cost and all the cash
flows during the lifetime of the project. The project is good to go ahead in ElectroServe Plc if the
net present value is positive (Bennouna, et al., 2010). The net present value has been calculated
considering 11% as the rate of discounting and resultant NPV over the 5 years period comes to $
2111007. Since the NPV is positive, the project is acceptable.
3. Internal rate of return: It is the rate of return at which the net present value is zero. It is usually
calculated by equating the net present of outflows with the net present of inflows over the
years. The minimum required rate of internal return as per company standards is 22%. Using the
IRR model, the rate of return comes to a staggering 104% which is way above 22% and therefore
the project is acceptable (Bromwich & Scapens, 2016).