Investment Appraisal Techniques and Sources of Funds for XYZ Co.

This document provides information about the investment appraisal techniques used by XYZ Co to analyze the proposed projects. It discusses the different techniques such as NPV, IRR, PI, ROCE, PP, and DPP. It also explores the sources of funds available for the projects and ranks the projects based on their financial viability.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL MANAGEMENT
Table of Contents
1. Determining the cost of equity, cost of debt and weighted average cost of capital for XYZ Co.:
.........................................................................................................................................................2
2. Calculating expected net present value (NPV), internal rate of return (IRR), profitability index
(PI), return on capital employed (ROCE), payback period (PP) and discounted payback period
(DPB) for each project:....................................................................................................................2
3. Ranking the projects according to NPV, IRR, PI, ROCE, PP and DPP to make appropriate
decision:...........................................................................................................................................6
4. Analyzing the investment appraisal techniques used by XYZ Co and the sources of funds
currently available for the proposed investments:...........................................................................7
References and Bibliography:........................................................................................................10

2FINANCIAL MANAGEMENT
1. Determining the cost of equity, cost of debt and weighted average cost of capital for XYZ
Co.:
Particulars Value
Current share
price 12
Dividend 0.12
Growth rate 7%
Cost of equity 8.00%
Particulars Value
Face value 100
Interest rate 10%
PMT 10.00
Time 8
Current
price 109
Cost of debt 8.41%
Particulars Value
Equity 2,90,00,000
Debt 5,30,00,000
Total capital 8,20,00,000
We 35.37%
Wd 64.63%
Cost of equity 0.08
Cost of debt 8.41%
Tax 30%
Weighted average cost of capital for XYZ
Co 6.63%

3FINANCIAL MANAGEMENT
2. Calculating expected net present value (NPV), internal rate of return (IRR), profitability
index (PI), return on capital employed (ROCE), payback period (PP) and discounted
payback period (DPB) for each project:
Project X
Machine costing
11,00,
000
Installation cost
27,
000
scrap value
44,
000
Depreciation
2,64,
000
cost of capital 8.00%
Year 0 1 2 3 4
Production units 25,800 27,200 26,600 23,600
Sales units 22,600 25,600 28,200 26,800
Variable production cost
per unit 74 87 87 99
Selling price per unit 108 114 132 137
Sales value 24,40,800 29,18,400 37,22,400 36,71,600
Variable production cost
-
19,09,200
-
23,66,400
-
23,14,200
-
23,36,400
Fixed overheads
-
4,60,000
-
4,75,000
-
4,90,000
-
5,05,000
Depreciation
-
2,64,000
-
2,64,000
-
2,64,000
-
2,64,000
Scrap value 44,000
PBT
-
1,92,400
-
1,87,000 6,54,200 6,10,200
Tax - - 1,96,260 1,83,060
PAT
-
1,92,400
-
1,87,000 4,57,940 4,27,140
Cash flow
-
11,27,000 71,600 77,000 7,21,940 6,91,140
Cum-cash
-
11,27,000
-
10,55,400
-
9,78,400
-
2,56,460 4,34,680

4FINANCIAL MANAGEMENT
Dis-rate 1.00 0.93 0.86 0.79 0.74
Dis-cash
-
11,27,000.0
0 66,296.30 66,015.09
5,73,099.2
5
5,08,008.5
3
Dis-cum-cash
-
11,27,000.0
0
-
10,60,703.70
-
9,94,688.6
1
-
4,21,589.3
7 86,419.17
NPV
86,419
.17
IRR 10.49%
PI 1.08
ROCE 19.63%
Payback period 3.4 Years
DPB 3.8 Years
Project Y
Machine costing
11,80,
000 15%
scrap value
59,
000
Depreciation
1,77,
000
1,50,
450
1,27,
883
1,08,
700
cost of capital 8.41%
Year 0 1 2 3 4
Sales units 4,600 5,750 6,900 6,210
Variable production
cost per unit 111 96 81 66
Selling price per unit 177 175 173 171
Sales value 8,14,200 10,06,250 11,93,700 10,61,910
Variable production
cost
-
5,10,600
-
5,52,000
-
5,58,900
-
4,09,860
Fixed overheads
-
96,000
-
1,01,000
-
1,06,000
-
1,11,000
Depreciation
-
1,77,000
-
1,50,450
-
1,27,883
-
1,08,700
Scrap value 59,000

5FINANCIAL MANAGEMENT
PBT 30,600 2,02,800 4,00,918 4,91,350
Tax 9,180 60,840 1,20,275 1,47,405
PAT 21,420 1,41,960 2,80,642 3,43,945
Cash flow
-
11,80,000 1,98,420 2,92,410 4,08,525 4,52,645
Cum-cash
-
11,80,000
-
9,81,580
-
6,89,170
-
2,80,645 1,72,000
Dis-rate 1.00 0.92 0.85 0.78 0.72
Dis-cash
-
11,80,000.0
0 1,83,028.33 2,48,804.34
3,20,639.4
7
3,27,709.6
6
Dis-cum-cash
-
11,80,000.0
0
-
9,96,971.67
-
7,48,167.33
-
4,27,527.8
6
-
99,818.20
NPV
-
99,818.20
IRR 4.98%
PI 0.92
ROCE 23.85%
Payback period 3.6 Years
DPB 4.3 Years
Project Z
Machine costing
10,20
,000 25%
Working capital
3
8,000
Depreciation
1,53
,000
2,16,
750
1,62,
563
1,21,
922
Fixed cost 3,000
cost of capital 6.63%
Year 0 1 2 3 4
Sales units 2,800 3,200 5,600 7,600
Variable production
cost per unit 199 210 221 232

6FINANCIAL MANAGEMENT
Selling price per unit 295 307 319 331
Sales value 8,26,000 9,82,400 17,86,400 25,15,600
Variable production
cost
-
5,57,200
-
6,72,000
-
12,37,600
-
17,63,200
Fixed overheads
-
3,000
-
3,000
-
6,000
-
6,000
Depreciation
-
1,53,000
-
2,16,750
-
1,62,563
-
1,21,922
PBT 1,12,800 90,650 3,80,238 6,24,478
Tax 33,840 27,195 1,14,071 1,87,343
PAT 78,960 63,455 2,66,166 4,37,135
Cash flow
-
10,58,000 2,31,960 2,80,205 4,28,729 5,97,057
Cum-cash
-
10,58,000
-
8,26,040
-
5,45,835
-
1,17,106 4,79,950
Dis-rate 1.00 0.94 0.87 0.80 0.74
Dis-cash
-
10,58,000.00
2,17,529.0
6
2,42,389.0
1
3,42,099.5
6 4,39,458.89
Dis-cum-cash
-
10,58,000.00
-
8,40,470.9
4
-
5,98,081.9
3
-
2,55,982.3
7 1,83,476.52
NPV
1,83,47
6.52
IRR 14.16%
PI 1.17
ROCE 28.55%
Payback period 3.2 Years
DPB 3.6 Years

7FINANCIAL MANAGEMENT
3. Ranking the projects according to NPV, IRR, PI, ROCE, PP and DPP to make
appropriate decision:
Particulars Project X Project Y Project Z
NPV 86,419.17 -99,818.20 1,83,476.52
IRR 10.49% 4.98% 14.16%
PI 1.08 0.92 1.17
ROCE 19.63% 23.85% 28.55%
Payback
period 3.37 3.62 3.20
DPB 3.83 4.30 3.58
Rank 2 3 1
4. Analyzing the investment appraisal techniques used by XYZ Co and the sources of funds
currently available for the proposed investments:
The calculations conducted in the above table that it provides information about the
different investment appraisal techniques used for analysing the projects propose to XYZ Co.
The different investment appraisal techniques such as NET present value, internal rate of return,
profitability index, return on capital employed, payback period, and discounted payback period is
used for analysing the financial viability of the proposed projects. XYZ Co is proposed three
different projects with alternate cost of capital requirements, as it helps in identifying the
relevant investment opportunity that could increase firm’s value in future. On the contrary, Baum
and Crosby (2014) argued that investment appraisal techniques does not provide adequate result
with faulty research, hence the research regarding the investment proposal needs to be conducted
diligently to increase the authenticity of the output delivered by the investment appraisal
techniques. Furthermore, the analysis of the investment appraisal techniques calculated for
different projects directly highlights the project, which is most suitable for investment purposes.

8FINANCIAL MANAGEMENT
The above ranking system, which is conducted directly, helps in identifying that project Z is the
most viable investment option for the organization, as the cost of capital includes both debt and
equity. On the other hand, the second best proposal is project A, as it provides a higher NPV
value with comparison to protect Y. Therefore, from the analysis, it could be identified That
investment in project Z eventually allow XZY Co to improve the level of income in the long run.
Throsby (2016) indicated the companies with the help of investment appraisal techniques are
able to segregate investment proposal on the basis of benefit that could be provided to the
organisation after its completion.
There are different sources of finance, which could be used by the company to support
the commencement of the proposed project. The different sources of finance that could be used
by the organization are equity finance and debt Finance. The current composition of weighted
average cost of capital is mainly divided equity and debt capital. Therefore, issuing both equity
and debt to acquire the required funding for the project would be more adequate for the
organization, as it will minimize the level of cost that would incur for the proposed project. The
different types of financing that is available to XYZ Co are depicted as follows.
Equity financing:
One of the major financing activities that could be conducted by the organization is
issuing of shares, which allows the management to acquire the capital required for investment
through equity financing. From the relevant valuation issuing shares for your new project would
allow the organization to acquire the required capital and reduce the level of debt accumulation
in the organization (Harris, 2017). Only one type of equity financing can be conducted by the
organization, as no other options available for the management of XYZ Co.
Issue of Corporate bonds:

9FINANCIAL MANAGEMENT
There are two different types of debt financing that could be conducted by XYZ Co for
acquiring the required level of capital to support the proposed project. The organization can
adequately issue corporate bonds with relevant coupon payments acquire the required capital for
commencing the overall projects. Schlegel, Frank & Britzelmaier (2016) stated that with the
increment in the corporate bond issue the overall debt in the organization will increase, which in
turn could raise the debt finance cost and reduce the total profits that could be generated from
operations.
Bank loans/ Mortgage financing:
The second option that is available to the organization is bank loans on mortgage finance,
which is easier to get from relevant Financial Institutions. The organization could adequately
utilize the bank loan to support its overall project and acquired the required funds to initiate the
first stage. Moreover, the loans and mortgages would directly increase the finance cost of the
organization as a relevant interest payments and principal payments need to be conducted by the
company to nullify the loan amount in future.
Hence, XYZ Co can use both corporate bonds and equity issue to acquire the required
funds for Project Z.

10FINANCIAL MANAGEMENT
References and Bibliography:
Almarri, K., & Blackwell, P. (2014). Improving risk sharing and investment appraisal for PPP
procurement success in large green projects. Procedia-Social and Behavioral
Sciences, 119, 847-856.
Awojobi, O., & Jenkins, G. P. (2016). Managing the cost overrun risks of hydroelectric dams:
An application of reference class forecasting techniques. Renewable and Sustainable
Energy Reviews, 63, 19-32.
Ballestero, E., Pérez-Gladish, B., & Garcia-Bernabeu, A. (2015). Socially responsible
investment. A Multi-criteria Decision Making Approach. International Series in
Operations Research & Management Science, 219.
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Brisley, R., Wylde, R., Lamb, R., Cooper, J., Sayers, P., & Hall, J. (2016). Techniques for
valuing adaptive capacity in flood risk management. Proceedings of the ICE-Water
Management, 169(2), 75-84.
Ezeokoli, N. B., Adebisi, O. S., & Olukolajo, M. A. (2014). The practice of investment viability
appraisal in Akure, Nigeria. Ethiopian Journal of Environmental Studies and
Management, 7(5), 581-587.
Ezeokoli, N. B., Adebisi, O. S., & Olukolajo, M. A. (2014). The practice of investment viability
appraisal in Akure, Nigeria. Ethiopian Journal of Environmental Studies and
Management, 7(5), 581-587.

11FINANCIAL MANAGEMENT
Harris, E. (2017). Strategic project risk appraisal and management. Routledge.
Schlegel, D., Frank, F., & Britzelmaier, B. (2016). Investment decisions and capital budgeting
practices in German manufacturing companies. International Journal of Business and
Globalisation, 16(1), 66-78.
Throsby, D. (2016). Investment in urban heritage conservation in developing countries:
Concepts, methods and data. City, Culture and Society, 7(2), 81-86.