Financial Analysis and Decision Making

This document provides an analysis of financial decision making techniques such as net present value, discounted payback, internal rate of return, and profitability index. It discusses their importance in evaluating investment proposals and provides a case study example of Jamieson Wellness. The analysis concludes that the proposal is acceptable and profitable.

Running Head: FINANCIAL ANALYSIS 1
FINANCIAL ANALYSIS AND DECESION MAKING

FINANCIAL ANALYSIS 2
Table of Contents
Net present value...................................................................................................................................3
Discounted pay back..............................................................................................................................3
Internal rate of return.............................................................................................................................3
Profitability Index..................................................................................................................................4
References.............................................................................................................................................5

FINANCIAL ANALYSIS 3
Net present value
Net present value can be termed as the difference between the cost of the equipment held
originally and the present value of the annual cash flows. It is assumed that the net present
value is worth more than the future value and therefore in the process of the capital budget,
the net present value commonly known as NPV is also one of the major decisions making
factor of whether the proposal shall be accepted or rejected (Schrader, Piel and Breitner,
2018). As per the case of Jamieson Wellness the NPV of the project is $3197587, which
reflect that the company is able to take away the cost of the equipment and the
Discounted pay back
Payback period is known as the length of the time the organization is required to pay back
against the expense that have been incurred during the acquisition of the project. Since the
more drawn out higher payback are not the ideal decision of the organization and the
organization rejects the acknowledgment of those proposals, hence it is advised that the
payback period is shall be less. The payback period of the proposal opted by Jamieson
Wellness is 3.13 years which suggest that the company will be able to repay within the years
and few months along with it. Generally the payback period shall be lower, however
considering the period of 10 years the payback period is sound and smooth. The company
shall accept the proposal in such a scenario, as they are able to generate enough cash flows
(Gabriel, et al 2016).
Internal rate of return
Internal rate of return in the other hand is the criteria that measure the profitability of the
business and the other potential proposals that can be accepted by the business for the future
growth and sustainability. The internal rate of return is applied on the annual cash flows. As

FINANCIAL ANALYSIS 4
described in the case study the internal rate of return is 10% and whereas while calculating
for the company Jamieson Wellness the internal rate of return is very superior at 72%, which
covers almost 3/4th cost of the business proposal. The benefit to the company for using the
IRR technique is, it’s simple to apply and understand (Bora, 2015).
Profitability Index
Profitability index is also known as one of the most valuable ratio that depicts the value of the
investments to pay off the proposed project. This tool is considered as the important tool in
determining the ranks of the projects or the proposals. It is calculated on the basis of the
present value divided by the original cost. As it can be observed the profitability index of
proposal chosen by the Jamieson Wellness is 3.6 which indicates the positive front and
assures that he proposal will be fruitful to the company (Damodaran, 2016).
Therefore from the overall analysis it is advised that Jamieson Wellness shall accept the
proposal and must take the decision after evaluating all the techniques and the outcomes of
those techniques. Otherwise on an overall basis the proposal is acceptable and profitable.

FINANCIAL ANALYSIS 5
References
Bora, B., 2015. Comparison between net present value and internal rate of
return. International Journal of Research in Finance and Marketing, 5(12), pp.61-71.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
Gabriel Filho, L.A., Cremasco, C.P., Putti, F.F., Goes, B.C. and Magalhaes, M.M., 2016.
Geometric Analysis of Net Present Value and Internal Rate of Return. Journal of Applied
Mathematics & Informatics, 34, pp.75-84.
Schrader, P., Piel, J.H. and Breitner, M.H., 2018. Decoupled Net Present Value—An
Alternative to the Long-Term Asset Value in the Evaluation of Ship Investments?.
In Operations Research Proceedings 2017 (pp. 271-276). Springer, Cham.