Financial Management: Investment Appraisal Techniques, Effects of Proposal, and Valuation Metrics

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION .........................................................................................................................3
QUESTION-2.................................................................................................................................3
A-) Evaluation of various methods in connection to the investment appraisal techniques.......3
B-) Critical evaluation of effects of proposal on the firm.........................................................6
C-) Discussion of benefits and drawbacks of different investment appraisal techniques.........6
QUESTION 3.................................................................................................................................8
A) Price earning ratio model (P/E ratio): ..................................................................................8
(B) Discounted cash flow technique .........................................................................................9
C) Dividend calculation method:...............................................................................................9
d) From the above techniques it must clear that the problems are finding while using the
various methods and give suggestion with economic explanation of kings plc......................10
CONCLUSION............................................................................................................................13
REFERENCES.............................................................................................................................14

INTRODUCTION
The term financial management comprises of two words i.e. finance and management. It
refers to the tool of organising, planning, directing and controlling the financial activities of the
business organisation to maintain the appropriate utilization and maintenance of funds
(Baihaqqy and et.al., 2020). This reports looks into the various aspects that are associated with
the investment appraisal techniques and the calculations of same. In addition to this , the
following report also highlights the benefits and drawbacks associated with the various capital
budgeting methods. Moreover, this reports also holds the evaluation task in accordance with the
takeovers and mergers and also involves the estimation of price earning ratio, discounted cash
flow method and dividend valuation method. Furthermore, it also encompasses the problems
encountered in using different valuation metrics.
QUESTION-2
A-) Evaluation of various methods in connection to the investment appraisal techniques
Investment appraisal is a method by which a firm can examine the attractiveness of the
upcoming projects by using different techniques. They are- Net present value method,
profitability index, Accounting rate of return method, and payback period. These techniques
provide valuable insights on the project acceptability and profitability.
Payback Period- This means the amount of time taken to recoup the initial cost of investment
on a project. Or, it can also be elaborated as the length of time taken by an investor to reach the
break-even point. If the payback period is shorter then it is considered that the investment shall
be made on that project, but if the payback period is longer than it is not an attractive
investment and hence it shall be rejected (Dalal and Thaker, 2019.). The evaluation using this
method is carried out through dividing the amount of investment by the annual cash flow. This
tool is mainly used by the investors and corporates to calculate the return on investments and is
beneficial in helping the firm by providing them the base for decision making.
Year Annual Cash
Inflow
Annual Cash
Outflow
Annual Net cash
flows
Cumulative cash
flows

0 -588.5 -588.5 0
1 233.7 33.2 200.5 200.5
2 233.7 33.2 200.5 401
3 233.7 33.2 200.5 601.5
4 233.7 33.2 200.5 802
5 233.7 33.2 200.5 1002.5
6 233.7 33.2 200.5 1203
7 233.7 33.2 200.5 1403.5
7SV 76.51 - 76.51 1480.01
Total 1635.9 -356.1 891.51 1480.01
Payback period- Number of complete years + ( Cash outflow – total inflow till date ) /
Cumulative cash flows
= 2 + ( 588.5 – 401 ) / 601.5
= 2 + 0.312
= 2.312
Average rate of return – This financial management tool represents the percentage of expected
rate of return on a project as compared to the initial cost of an asset. In short, it can be explained
as a method that helps in the determination of annual percentage rate of a return linked with an
asset or investment(Dewi and et.al., 2020.). It is helpful when the multiple projects have to be
examined, as it gives the average return on each project.
Average rate of return- Average of annual amount of cash flow / Initial investments
ARR = Annual average profits / cost of investments * 100
ARR = ( 127.36 / 588.5 ) * 100
wherein ,Annual average profits can be determined as = 1480.005 / 7
=121.36