Investment Appraisal Techniques and Mergers and Takeovers

Financial Management

TABLE OF CONTENTS
Question 2 - Investment Appraisal Techniques.........................................................................3
(a) Calculations regarding investment appraisal...............................................................3
(b) Discussing the effect of proposal on Super Tasty Limited..........................................5
(c) Evaluating the benefits and limitations of each investment appraisal technique........6
Question 3 – Mergers and Takeovers.........................................................................................9
a) Price/earnings ratio............................................................................................................9
b) Discounted cash flow method (DCF)..............................................................................10
c) Dividend valuation method..............................................................................................11
d) Critical analysis................................................................................................................12
REFERENCES.........................................................................................................................14

Question 2 - Investment Appraisal Techniques
(a) Calculations regarding investment appraisal
Years cash inflow
Cash
outflow
depreciatio
n EBIT
Net Cash
inflow
1 123000 25500 118449 -20949 97500
2 123000 25500 86467.7 11032.3 97500
3 123000 25500 63121.6 34378.4 97500
4 123000 25500 46078.8 51421.2 97500
5 123000 25500 33637.3 63862.7 97500
6 123000 25500 24555.31
72944.6
9 97500
i. Payback Period
Years Net Cash inflow Cumulative Cash flow
1 97500 97500
2 97500 195000
3 97500 292500
4 97500 390000
5 97500 487500
6 97500 585000
Payback
period
4
48800
0.500513
Payback
period 4.5 years
The payback period explains when an initial investment will be recovered in terms of
years. From the above mentioned table it can be evaluated that Super Tasty Limited will

recover its initial investment of 438700 in 4.5 years. The indications are showing positive
outcome according to the Payback period of capital appraisal technique.
ii. Accounting Rate of Return
Initial Investment 438700
Life of machine 6
Depreciated
amount
62149.1
6
Average
investment
250424.
6
Average EAT 97500
ARR 0.39%
This is calculated for the purpose of identifying the expected rate of return n
investment. The above illustrated table shows the 0.39% of ARR.
iii. Net Present Value
Years Net Cash inflow
PV factor
@13%
Discounted cash
flow
1 97500 0.884955752 86283.18
2 97500 0.783146683 76356.80
3 97500 0.693050162 67572.39
4 97500 0.613318728 59798.57
5 97500 0.542759936 52919.09
6 97500 0.480318527 46831.05
Sum of discounted
cash flow 389761.10
Initial investment 438700