Financial Management: Net Present Value and Investment Appraisal

Financial management

Contents
INTRODUCTION...........................................................................................................................1
Calculating the net present value.................................................................................................1
Explaining which project should be accepted.............................................................................4
Recommendations........................................................................................................................5
Critically discussing the use of net present value as a method of investment appraisal..............6
Use of alternative approaches to capital investment appraisal....................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial management is the procedure of managing the financial resources, recording and
presentation of an organisation which can assist in procedure of decision making. The concept of
financial management is said to be used in three parameters which are investment decision,
financing decision and dividend decision (Altman and et.al., 2017). The main aim of this report
is to develop an understanding about the concepts of quantitative and qualitative accounting
information in an organisation. For this purpose, an organisation is selected which is Hamilton
Inc. This organisation is a sports equipment manufacturer which is located in USA. This
company is a growing organisation and continuously advancing their technologies. This
company is considering purchase of a new machinery and for this proposal technique of NPV is
used in order to analyse its viability.
In this report, financial analysis will be conducted in which net present value of both the
proposals will be evaluated along with a detailed explanation. Further, this report will cover
recommendations for this company which will be based on NPV computation. At last, the
investment appraisal technique of net present value will be analysed along with few alternative
approaches of net present value.
QUESTION 1
Calculating the net present value
Hamilton Inc. is an organisation which manufacture sports equipment. This company is
considering replacing one of their basketball manufacturing machinery (MA02) with an
advanced machinery (MA05). It is believed that MA05 will produce higher quality basketballs
which will result in increase in sales.
There are total of two proposals which Hamilton Inc. is considering. The first proposal
states that company will continue the use of MA02 till 2020 and then sell it with the residual
value of $80,000. The Second proposal states that the company will replace MA02 with MA05
in which MA05 will be acquired for $ 1.7 million and MA02 will immediately sold for $100,000
and after three years MA05 will also be sold for $200,000. Considering determinants for both the
proposals and inflation rates. The NPV for both the projects are computed below along with
extensive working notes:
1

**All amounts in $ 000
PROPOSAL 1: Continue the usage of MA02
Year Net cash
flow (A)
PV factor cal-
culation
PV factor @
11%
Discounted cash
flow (A*B)
2019 201 1/(1+0.11) 0.900900901 181.0810811
2020 181 1/(1+0.11)^2 0.811622433 146.9036604
2020 80 1/(1+0.11)^2 0.811622433 64.92979466
Total discounted
cash flow 392.9145362
Less: initial invest-
ment
Net Present value 392.9145362
**All amounts in $ 000
PROPOSAL 1: Replace the MA02 with the MA05
Year Net cash
flow (A)
PV factor cal-
culation
PV factor
@ 11%
Discounted cash
flow (A*B)
2018
100 (MA0 2
Sale) 100
2019 545.51 1/(1+0.11) 0.900900901 491.4504505
2020 701.06 1/(1+0.11)^2 0.811622433 568.9960231
2021 613.31 1/(1+0.11)^3 0.731191381 448.4469861
2021 200 1/(1+0.11)^3 0.731191381 146.2382763
Total discounted
cash flow 1755.131736
Less: initial invest-
ment 1700
Net Present value 55.13173583
Working notes:
**All amounts in $ 000
Cash inflows MA02 MA05
2019 620 1150
2020 600 1450
2