Investment Analysis and Evaluation

This assignment evaluates two investment projects (Investment 1 and Investment 2) based on various financial metrics. It calculates the Net Present Value (NPV), Payback Period, and Accounting Rate of Return (ARR) for each project. The analysis highlights the strengths and weaknesses of each investment option and considers their impact on short-term and long-term cash flows. Ultimately, it aims to help decision-makers like Mark & Paul determine the most favorable investment based on their business goals.

Financial management and Investment
appraisal

Table of Contents
Investment One......................................................................................................................................3
Investment Two.....................................................................................................................................6
Bibliography...........................................................................................................................................8

Investment One
A. From the current situation it the nature of business is short term and if mark and paul will
get a good return from this investment than they can continue their business in the future.
And the scope of this business is good and the cost of the investment depends on the area
where they want to start their business like near to a beach, in the centre of city or little far to
the city.
B. Calculation of Different budgets
(a) Sales Budget
(b) Labour Budget
Labour Budget
Months
Total
Hours
Rate Per
hour
Total Labour
Cost
June 36 23 2484
July 36 23 2484
August 36 23 2484
Septembe 36 23 2484
Sales Budget
Products June July August September
Meal
Sales(units) 20000 18000 18000 22000
Average Selling Price 45 45 45 45
Sales ($) 900000 810000 810000 990000
Drinks
Sales(units) 60000 54000 54000 66000
Average Selling Price 6 6 6 6
Sales ($) 360000 324000 324000 396000

r
(c) Cash Budget
Cash Budget
Particulars June July August Septembe
r
(A) Opening
Balance
80000 111151
6
221603
2
3271548
Receipts
Sales:
Meals 900000 810000 810000 990000
Drinks 360000 324000 324000 396000
Total (A) 134000
0
224551
6
335003
2
4657548
(B) Payments
Purchase of
Machinery
110000 0 0 0
Purchase of
Furniture
30000 0 0 0
Purchase of Vehicle 43000 0 0 0
Purchase of Utensils 18000 0 0 0
Payment to
suppliers:
Meals 0 0 40000 40000
Drinks 0 2000 11000 20000
Salary to Staff 2484 2484 2484 2484
Drawings 20000 20000 20000 20000
Overhead cost 5000 5000 5000 5000
Total (B) 228484 29484 78484 87484
Closing Balance 111151 221603 327154 4570064

(A-B) 6 2 8
Working Notes
(i) Payment to Suppliers for Produce
Payments of Suppliers(Produce)
Months Purchases June
Jul
y August September
June - - - - -
July - - - - -
August 40000 - - 40000 -
September 40000 - - - 40000
Total 80000 0 0 40000 40000
(ii) Payment to Suppliers for Drinks
Payments of Suppliers(Drinks)
Months Purchases June July August September
June - - - - -
July 20000 - 2000 9000 9000
August 20000 - - 2000 9000
September 20000 - - - 2000
Total 60000 0 2000 11000 20000
C. Sales Budget shows that mark and Paul will achieve their objective and the cost of
investment will recover. Labour budget shows the payment made to the casual staff. Cash
budget shows the net receipts and payments of the company and the receipts of the company
have a substantial growth as compared to their payments (Schmidt, 2017).
Investment made by the Mark and Paul will give them a huge profit in the near future and
they have to grab this opportunity in order to receive huge profit. In cash budget the cost of
initial investment will recover from the sale of June month and the expenses of the restaurant
is not more (Course).

D. Before making the investment decision they have to consider various practical issues like
evaluating their current situation, objective for investing, evaluating the nature of risk and
comfort zone, create and maintain an reserve fund, maintain a portfolio etc
(SELVANAYAKI & SIVAKUMAR, 2015).
Investment Two
Initial Cash Outflow = 390000
YEAR Cash Inflow Present Value
Factor@12%
Present
Value of
Cash Inflow
Cumulative Present
Value Of Cash Inflow
1 100000 0.893 89300 89300
2 230000 0.797 183310 272610
3 190000 0.712 135280 407890
4 140000 0.636 89040 496930
Tota
l
660000 496930
Net Present Value = Present Value of Cash Inflow – Present Value of Cash Outflow
Net Present Value = 496930-390000 = 163070
Payback Period = 2 + {(390000-272610/407890-272610)*(3-2)}
Payback Period = 2.868 Years
Average Cash Inflow = 660000/4 = 165000

Accounting Rate of Return = Average Cash Inflow/Initial Investment
Accounting Rate of Return = 42.31%
Net Present Value method is explicitly identifying the time value of money. In life time of
investment how much benefit it can give. In the current situation net present value give
benefit with recognizing its time value.
Payback period is the method in which company determines how many years will it take to
complete the initial cost of investment. In the current situation initial cost of investment
recovers in 2.86 years.
Accounting rate of return is used to compare with Pre determined ARR and if the actual is
more than Pre determined than project should be accepted. Actual ARR of the company in
the current situation is 42.31% which is very good (Course).
Investments made here are not comparable but even if compared investment 1 give us better
opportunity to invest as it is for short term. Investment 2 is for long term purpose .Mark &
Paul must decide whether they want to continue the business for long term or short term
because short term gives a plenty of cash inflows in a limited time period but in the
investment two they are doing a different business and they have good cash inflow in the
future (Juhász, 2011).

Bibliography
Bragg, S. (2013). Budget variance. Retrieved Aug 10, 2017, from
https://www.accountingtools.com/articles/what-is-a-budget-variance.html
Course, M. A. (n.d.). Return on Capital Employed. Retrieved July 27, 2017, from My
Accounting Course: http://www.myaccountingcourse.com/financial-ratios/return-on-
capital-employed
Juhász, L. (2011). NET PRESENT VALUE VERSUS INTERNAL RATE OF RETURN.
Retrieved Sept 24, 2017, from
http://www.economics-sociology.eu/files/05%5B8%5D.pdf
Schmidt, M. (2017). Budget, Budgeting, and Variance Analysis. Retrieved Aug 10, 2017,
from https://www.business-case-analysis.com/budget.html
SELVANAYAKI, S., & SIVAKUMAR, S. (2015). Study on capital investment decisions and
impact of capital structure on profitability of rice milling firms. Retrieved Aug 16,
2017, from http://www.researchjournal.co.in/upload/assignments/6_49-53.pdf