Financial Management: Capital Appraisal Techniques, Investment Appraisal Techniques, and Valuation Methods

FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
QUESTION 2 ..................................................................................................................................1
a) calculating capital appraisal techniques and providing recommendation for economic
feasibility for acquiring machine ...........................................................................................1
b) Evaluating the effects of proposal on company................................................................4
Explaining benefits & drawbacks of investment appraisal techniques..................................5
QUESTION 3...................................................................................................................................6
a) Price/earning ratio..............................................................................................................6
b) Discounted Cash Flow method .........................................................................................7
c) Dividend valuation method ...............................................................................................8
d) Critically discussing the issues concerned with mentioned valuation methods................9
REFERENCES..............................................................................................................................13

QUESTION 2
a) calculating capital appraisal techniques and providing recommendation for economic
feasibility for acquiring machine
S.No
cash
inflows
Cash
outflows
(Depreciati
on)
cash inflow
after
depreciatio
n
Net cash
inflow
1 223600 32700 147075 43825 190900
2 223600 32701 110306 80593 190899
3 223600 32702 82730 108168 190898
4 223600 32703 62047 128850 190897
5 223600 32704 46535 144361 190896
6 223600 32705 34902 155993 190895
Payback Period
Year
Cash
inflows Cumulative cash inflows
1 190900 190900
2 190899 381799
3 190898 572697
4 190897 763594
5 190896 954490
6 190895 1145385
Initial investment 588300
Payback period
3 year+
(588300-572697)/190897
1

3years+ 0.08
Payback period 3.08 years
From the table it can be interpreted that Super Tasty Soup (STS) will be able to
recover the initial invested capital for the acquiring machine in 3.08 years. On the basis of
this it can be interpreted that cash inflows receiving are positive that can help in achieving
initial amounting in mentioned period.
Accounting rate of return
Year Cash inflows
1 190900
2 190899
3 190898
4 190897
5 190896
6 190895
Average cash inflow 190897.5
Average initial investment 294150
average initial investment [(initial
investment + scrap value) / 2] 64.90%
It will provide the organization accounting rate of return of 64.90% out of each dollar
invested. The obtained outcome is greater than ideal rate which is positive sign for
acquiring machinery.
Net present value
Year Cash PV factor Discounted cash inflows
2