Investment Appraisal Techniques in Global Manufacturing Firm
Added on 2019-12-04
11 Pages2191 Words165 Views
Finance
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FINANCE AND DECISIONMAKING
Table of Contents1. INTRODUCTION.......................................................................................................................32. Explanation and evaluation of investment appraisal techniques.................................................3Net Present value.........................................................................................................................4Internal Rate of Return ..............................................................................................................5Payback........................................................................................................................................7Average rate of return..................................................................................................................83. RISK AND UNCERTAINTY...................................................................................................10Expected values and decision tree.............................................................................................10Maximax....................................................................................................................................10Maximin.....................................................................................................................................10Sensitivity analysis....................................................................................................................11Conclusion.....................................................................................................................................11REFERENCES..............................................................................................................................12
1. INTRODUCTIONManagement of financial resources is the most important task for global manufacturingorganization. It assists management of corporation to access cost effective sources of finance inorder to reduce cost of production and ensure long run success of firm with increased rate ofreturn (Shim and Siegel, 2008). Present report is based on global manufacturing company thatrequire major investment in capital equipment. Further, investment approach techniques areselected to assess viability of project in the light of requirement of corporation. In addition tothis, risk and uncertainty has also be explain which might affect business in long run. 2. Explanation and evaluation of investment appraisal techniques Investment appraisal techniques are used to assess the viability of investment project andto identify the best project among various alternatives. In other words, it can be said thatinvestment appraisal tactics are used for identifying the attractiveness of aninvestment. Thesetactics are also called as capital budgeting tactics. There are four major tactics of investmentappraisal such as Payback period, Net present value method, internal rate of return and Averagerate of return (Investment appraisal techniques. 2016). Here, in the given scenario, a case ofglobal manufacturing company is given which is considering a major investment in capitalequipment. There are two machinery available in which they want to invest, the cash projectionand project information is given below: Table 1 Business proposalMachinery A Machinery BInitial Investment4000040000Cash Flow for Location A Cash Flow for Location BYear 12000020000Year 22500010000Year 3150005000The business entity is going to make use of make use of such calculation to assess theviability of project.
Net Present value The cited method is the most famous method of calculating the viability of andinvestment appraisal. This method considered the time value and money associated with theprojects to assess their viability. However, the major issue associated with the NPV is that it reliesheavily upon multiple assumptions and estimates such as investment costs, discount rate andprojectedreturns.Year Machinery ADiscounted rate 15%Present value on discount factor rateInvestment Cash flow (£)1200000.869173802250000.756189003150000.6579855Total present value 46135Initial investment40000Net present value 6135Machine B Year Machine B Discounted rate 15%Present value on discount factor rateInvestment Cash flow (£)1150000.869130352250000.756189003200000.65713140Total present value 45075Initial investment39000
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