Assignment of Financial Decision Making

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Added on 2019-12-04

Assignment of Financial Decision Making

Added on 2019-12-04

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Financial Decision Making1

Table of ContentsIntroduction..........................................................................................................................................3Alternative methods of investment appraisal.......................................................................................3Risk and uncertainty.............................................................................................................................4Discussing and evaluating the risk management techniques in the context of investment appraisal...........................................................................................................................................4CONCLUSION....................................................................................................................................6References............................................................................................................................................72

Assignment of Financial Decision Making_2

INTRODUCTIONInvestments are very important part of business. However firms are required to take investmentdecisions by making sound decisions. These decisions can be evaluated on the basis of applicationof investment appraisal techniques. The purpose of this report is to analyse three techniques so thata global manufacturing company can take sound decisions. Under this study, their assumptions,limitations and applicability will be discussed. The limitations and advantages associated with thetechniques will also be analysed. At last the report will end in evaluating the risk managementtechniques in investment appraisal.ALTERNATIVE METHODS OF INVESTMENT APPRAISALDifferent types of investment appraisal techniques are as follows:Net Present Value This method will help the organization in computing the present value of the proposedinvestment proposals. It will deduct the value of the project’s cost from the value of the futureincome. Positive NPV indicates that project is profitable one and negative NPV indicates that it willincur loss. The formula for NPS is as follows:Critical evaluation NPV technique takes into consideration the time value of money which changes veryfrequently at the time of high inflation or deflation. It can do the easy comparison of the proposaland can make the decision making process very straight forward (Olawale and et.al., 2010). Thediscount rate can be customized hence this makes the approach very flexible and customizable. It isvery effective in case of long projects. The approach is easy to apply and understand. However on the critical note it can be said that this technique is very time consuming. Itneeds complex calculations to be performed. It makes use of assumptions related to timing of thefuture cash transactions (Bennouna and et.al., 2010). The assumptions may or may not be reliablefor making the investment decision. Issues can be faced in small scale investment proposals.Interest rates associated with the option is also required to be estimated. Hence this decrease thevalidity and reliability of the option which is being considered for the investment. Payback period It discloses the time period need to recover the cost of an investment. It is an importantdeterminant in deciding whether the project should be undertaken or not. It is calculated bydetermining the number of years required to recover the funds invested in a particular project(Mahlia and et.al., 2011). It is calculated by following formula:3

Assignment of Financial Decision Making_3

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Assignment of Financial Decision Making