Financial Management: Investment Appraisal Techniques, Mergers and Takeovers

Financial Management

Table of Contents
Introduction-................................................................................................................................................3
Question 2-..................................................................................................................................................3
Investment Appraisal Techniques-..........................................................................................................3
Question 3 – Mergers and Takeovers..........................................................................................................9
Conclusion-...............................................................................................................................................13
References-................................................................................................................................................13

Introduction-
Financial management can be defined as an activity which is concerned with planning and
controlling funds that are used by company. This area deals with the capital sources which help
in achievement of goals or objectives of the organization. In this report several investment
appraisal techniques are discussed and it is also understood that how these techniques help in
decision making. Decision making is very important for an organization in order to increase
profitability and efficiency. Apart from this financial ratios are also discussed in this report.
Analysis of financial ratios gives information about the financial performance of the company.
Ratios are very effective in evaluation of various things like- profitability, solvency, liquidity and
efficiency etc. Management uses financial ratios to check the performance of the company in the
long term and short term.
Question 2-
Investment Appraisal Techniques-
(a) Calculate the following using investment appraisal techniques-
Payback Period- Investment= £438,700 (given)
Cash flow = inflow – outflow
= £123,000- £25,500
= £97500
So, payback period is: 438700/97500 => 4.50 years or 4 years 6 months
Accounting Rate of return-
Year cash inflow
Cash
outflow
Net cash
flow
Depreciatio
n
Accounting
profit
1 123000 25500 97500 100681.65 -3181.65
2 123000 25500 97500 73497.60 24002.40
3 123000 25500 97500 53653.25 43846.75
4 123000 25500 97500 39166.87 58333.13
5 123000 25500 97500 28591.82 68908.18

6 123000 25500 97500 20872.03 76627.97
268536.78
Average accounting profit: 268536.78/6
= 44756.13
ARR: 44756.13/438700*100
= 10.20%
Working Notes:
Calculation of depreciation
Depreciation Expenses = (Net Book Value –
Residual value) X Depreciation Rate
Net book value: 438700
Residual value: 15% of cost 65805
Depreciation rate 27%
Year
Net book
value
Residu
al value Rate
Depreciati
on
1
438700.0
0 65805 27 100681.65
2
338018.3
5 65805 27 73497.60
3
264520.7
5 65805 27 53653.25
4
210867.4
9 65805 27 39166.87
5 171700.6 65805 27 28591.82