Finance for Manager: NPV, Project Appraisal, Pricing Strategies

This report discusses the Net Present Value (NPV) of Alpha and Gamma projects, project appraisal methods, and pricing strategies for Finance Managers. It recommends Project Gamma based on NPV. The report evaluates Average Rate of Return (ARR) and Internal Rate of Return (IRR) as project appraisal methods. It also discusses Cost-plus and Penetration pricing strategies.

Finance for Manager

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
Compute the Net Present Value of the two projects- Alpha and Gamma and give
recommendation for the company's project................................................................................3
TASK 2............................................................................................................................................4
Evaluate two method of project appraisal except NPV..............................................................4
Asses the two pricing strategies..................................................................................................5
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The Net Present value (NPV) is the difference of the present value of cash inflows and
outflows. It is used in the capital estimation and investment planning to determine the
profitability of the project on the investment done. It also estimates the values of future cash
flows of every period and determines the correct discounting rate. Project appraisal is a process
of assessing and comparing the viability of the projects. Some tools are used to make the
decisions for the betterment of the company. It is used for the development of the company. The
pricing strategy helps the company to sustain for the long – run in the market (Siew and et. al.,
2019). This report, has analysed the cash flows of project alpha and gamma and calculated the
net present value. Based on the NPV,a project is selected. The pricing strategies and the project
appraisal tools are also use for the benefit of the company Bravo.
TASK 1
Compute the Net Present Value of the two projects- Alpha and Gamma and give
recommendation for the company's project.
Net Present Value: It is a capital budgeting tool to determine the profitability of the
investment (Tosetti and et. al., 2018). It calculates the present value of the investment based on
the discounting rate.
 Project Alpha: Initial Investment = 1750000
 Project Gamma: In Project Gamma, Cash Outflow is calculated by adding the Hire
expenditure of plant and equipment and other expenses.

Net Present Value:
Project alpha = 2569120
Project Gamma = 2750028
Recommendation: The initial investment of Project Alpha is 1,750,000 and the investment of
project gamma is on the lease basis. So every year a certain amount of 375000 is paid. The net
present value of project gamma is more. However, project Gamma will be recommended, as it is
generating more income and faster.
Company Bravo is introducing a new product in the new market, so for that it needs to determine
the cost and evaluate the overall profit of all the projects and then allocate the costs.. The project
gamma will help to consider its cost of capital and in making the future estimations about the
cash inflow and outflow. It also needs to critically manage the expenses and cost of the new
projects as well, which helps in maintaining the profit.
TASK 2
Evaluate two method of project appraisal except NPV.
Two techniques of project appraisal are:
1. Average Rate of Return (ARR): It is a relation between the average investment to the
total investments (Mulia, R., 2019). It calculates the average annual profit as a percentage
of initial investment.
Advantages Disadvantages
It plays a crucial part in the
investment proposal estimation.
The results of return on investment
and ARR are different, which makes it
harder to take decision.
It shows the benefit of the project in It does not consider the external

Advantages Disadvantages
percentage, which makes it easier to
compare with other projects..
factors which effects the profitability
of the project.
It considers the savings for the overall
period of the project.
The cash inflows are not take into
consideration which are more
important.
It is bases on accounting profit rather
than cash inflow, which can easily be
acquired from the financial
statements.
This method cannot be applies to the
project which are divided into parts.
It is easy to compute. It ignores the time of the project.
2. Internal rate of Return (IRR): It is a technique of discounting cash flow, which is used
for the project appraisal, and helps to determine the rate of return for the project (Jenner
and et. al., 2018).
Pros Cons
It is closely related to NPV, which
can lead to make same decisions.
It is difficult to chose the project, as
different sizes of projects cannot be
considered..
It uses the cash inflows and adjusts
the time value of money.
In this method, there is not need to
calculate cost of capital.
It calculates the return on the original
investment.
Non- conventional cash flows may
give multiple IRR.
Asses the two pricing strategies.
Pricing Strategies: It is a method that the companies use to fix the best price of its
commodity to maximise the profits by increasing the market demand. It consider the costs of

labour, production, advertisement expenses, overheads, competing pricing, merchandise margins
and the market conditions. There are various techniques to evaluate the correct price of the
goods. Some of the strategies are: Price skimming, penetration pricing, cost – plus pricing,
premium pricing.
Strategies that are used by Company Bravo are:
1. Cost – plus Pricing: This strategy is based on cost for settling the prices of the products.
Company Bravo achieves the margin of 15 – 25% on the cost plus basis. After launching
the new product, it has to make sure that the organisation always runs on then profit
(Wang and et. al., 2019). For this, It has to prepare a budgeted cost sheet taking into the
cost of raw materials, overhead and production cost.
2. Penetration Pricing: This plan of action uses the techniques of introducing the new
product at a low price in the new market (Kapferer and Valette-Florence, 2018).
Company Bravo is introducing a new commodity in the new market, this strategy will
stimulate the customers to purchase the goods. It will deter the competitor. After the
customer is established with the product, the enterprise can make hike in the prices.
CONCLUSION
This report can be concluded by saying that the company Bravo is utilising its resources
carefully. But for establishing the new product in the market it has to use some of the pricing
strategies to attract the customers. Based upon the NPV, a decision is made by comparing the
projects of the same time periods. The project which gives the higher NPV will be selected and
considered for future events. Project appraisal is used for the development of the projects and to
make the correct decisions. Every method used can give different results. So the tools and
techniques should be chosen carefully. The average rate of return and internal rate of return gives
different results most of the time. Pricing Strategies is a plan that the company Bravo is
following to set the prices of its commodities to maximize its profits. The type of strategies to be
used differ on the type of the company and the project. In this report, the Company Bravo is
using the cost – plus and penetration pricing strategy.

REFERENCES
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