Financial Management: Investment Appraisal Techniques and Valuation Models

FINANCIAL
MANAGEMENT

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Question No 2. Various Investment Appraisal Techniques and their recommendation..............3
a) Evaluation of projects considering the following models and their recommendations: -.......3
b) Evaluation of the effects of the proposal on the company: -...................................................6
c) Benefits and limitation of the different investment appraisal techniques used in decision
making.........................................................................................................................................6
Question No 3 Valuation of Dragon Plc. using different Valuation Models along with
Recommendation on Proposed Investment.................................................................................9
a) Price Earning Method: -..........................................................................................................9
b) Discounted Cash Flow Method: -............................................................................................9
c) Dividend Valuation Method: -...............................................................................................10
d) Problems associated with the above models along with recommendation to Kings Plc. with
respect to proposed acquisition..................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial management refers to preparation, categorising, guiding and monitoring of
financial activities in an establishment or an institute. It includes certain principles of
management which helps in operative and resourceful deployment of financial resources that is
useful in achieving goals and objectives to the corporate (Amel-Zadeh and Meeks, 2020). It is a
process of dealing with management of finance in an organisation in an effective way
considering time management also. This report includes practical solution with respect to
calculation of cost of capital taking into consideration historical value figures and market value
figures in capital structure. Further it involves practical approach with respect to recalculating the
cost of capital if an entity incorporates more debt in their capital structure and repurchase
ordinary shares from the market in order to cancel them. Another practical question is addressed
which consist of valuation of Dragon plc considering different models such as price earnings
ratio, Dividend valuation model etc.
TASK
Question No 2. Various Investment Appraisal Techniques and their recommendation.
a) Evaluation of projects considering the following models and their recommendations: -
1. The Payback Period: -
(Figures in Pound)
Year Annual Cash
Inflow
Annual Cash
Outflow
Annual Net
Cash flows
Cumulative
Cash
Inflows
0 -588300 NIL -588300 NIL
1 223600 32700 190900 190900
2 223600 32700 190900 381800
3 223600 32700 190900 572600
4 223600 32700 190900 -
5 223600 32700 190900 -
6 223600 32700 190900 -

6 (S.V) 88245 NIL 88245 -
Payback period will be: -
= 3 Years + (588300-572600) / 190900
= 3 Years + 15700/190900
= 3.08 Years.
Note: - Depreciation is the non-cash expense, since tax rate is not given in the question
hence it is ignored while decision making.
2. The Average Rate of Return: -
= Annual Average Profits / Cost of Investments * 100
= 205607.50 / 588300 * 100
= 34.95 %
Note: - Since average annual profits is not given in the question hence we have
considered average cash inflows as average profits.
3. The Net Present Value: -
Years Net Cash Inflows Discounting @ 10% PV of Cash Inflows
1 190900 .909 173528.10
2 190900 .826 157683.40
3 190900 .751 143365.90
4 190900 .683 130384.70
5 190900 .621 118548.90
6 190900 .564 107667.60
6 (S.V) 88245 .564 49770.18
PV of Cash Inflow
(A)
880948.78
PV of Cash Outflow
(B)
588300