Financial Management: Payback Period, Discounted Cash Flow, Accounting Rate of Return, Net Present Value, Internal Rate of Return

This document provides an overview of financial management techniques such as payback period, discounted cash flow, accounting rate of return, net present value, and internal rate of return. It explains their advantages, disadvantages, and applications in investment appraisal. The document also discusses the concepts of merger and acquisition and price earnings ratio.

Financial management

Table of Contents
Introduction......................................................................................................................................2
Payback period.............................................................................................................................3
Merger and acquisition.................................................................................................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

Introduction
Financial management levels to the lining organising and controlling of the financial activities in
the organisation (Bulturbayevich and et.al 2020). This report focuses on IRR, NPV, and payback
period. Besides this, price earning ration and discounted cash flow is also mentioned in this
report.
Payback period
Payback period is widely used in capital budgeting. Payback period shows the required time to
reach at the breakeven point. Payback period includes positive and negative cash flow to
calculate the break even and assist the company how much investment they have to make more
to reach at the breakeven point. As per the Thumb rule it states that shorter payback period give
more return as compared to longer payback period. One of the biggest advantages of using
payback period is that the concept is very simple and easy to adopt. It helps the company and
investor to know the return on the invested amount in how much money they will generate in the
future apart from this it also gives the information about risk which is present in the investment
Discounted cash flow
It is also one of the methods which is used for valuation and it estimate the value of an
investment which is based on its expected and predicted future cash flow (Atmadja and et.al
2018). Discounted cash flow helps in analysing the value of an investment which is present today
the value is based on projections of money which will going to generate in the future.
Accounting rate of return
Accounting rate of return as widely known as average rate of return. It is also one of the financial
ratio which is used and proffered in capital budgeting. This ratio also helps the investor to know
the rate of return on their investment. Apart from this accounting rate of return compares the
future expected price to present value. One of the biggest advantages of accounting rate of return
is that it is being used in multiple projects and provides expected rate of return for each and
individual project. Accounting rate of return to not used for long-term projects as it increases the
uncertainty of long time duration apart from this it does not consider any kind of risk in the
investment. Basically accounting rate of return provides the profitability off the investment by
evaluating the capital invested in the project. One of the biggest advantages of accounting rate of

return is that it is easy to calculate and provide accurate results to the investor and Company.
Besides this the main feature of accounting rate of return is that it measures the overall
performance and current performance of the project and gives the rate of profitability to the
investor so that they can make their decision according to the return (Brigham and et.al 2021).
This method provides a comparison of different projects to the investor so that they can select
best option which is available for them and create profit in the long run.
Net present value
Net present value provides the present value of the cash flow on the required rate of return for the
project which is compared to the initial investment. Basically net present value is the difference
between cash inflow and the cash outflow for a period of time. This is also a tool of capital
budgeting which is used to analyse and recognise the profitability of the project. Net present
value is used to compare different investment alternatives. Net present value is fully dependent
on discount rate which can be calculated from the cost of capital required. The main motive of
using net present value is to calculate the total value which is present today and it assist the
company or the investor about the future payment and expenses. Positive net present value shows
that the project is in profit and investment will provide better return to the investor and the
company (Loke, 2017). On the flip side and negative net present value shows that investor or the
company will face loss in the future. Net present value shows that whatever value of the money
is present today will not remain the same in the future it may fall down or will raise so as per the
money net present value provides better education and information to the investor so that by
seeing all the projected net present value they can make their investment decisions.
Internal rate of return
Internal rate of return is it tool and matrix which is used and financial analysis to recognise the
profitability of the investment. The internal rate of return is popularly known as discount rate
which makes the net present value and cash flow equal to zero in the analysis of discounted cash
flow. The formula of internal rate of return is similar to net present value. It shows the annual
rate of return which makes the entire net present value equal to zero (Wijesuriya and et.al 2017).
Higher rate of return shows that project is going to have high profitability and will generate more
return as compared to low internal rate of return. It is also used in selecting best project and
investment option from the available options. It helps the investor to compare different projects
and investment options and assist them to select best option for them which will provide them

better return and outcome. Internal rate of return widely used to know the potential rate of return
on the project.
Advantage and disadvantage of investment appraisal technique
Advantages of Payback period
One of the biggest advantages of Payback period is that it is easy to calculate and use. Apart from
this payback period used very less inputs and provide better result. With the help of initial cost of
project and annual cash flow payback period can be calculated. Apart from this it provides quick
solution to the company about the investment. As it is useful for shorter time duration therefore
payback period provides more liquidity to the investor.
Limitations of Payback period
As payback period has many advantages but the biggest limitation of this method is that it knows
the time value of money from the project (Crespo and et.al 2019. ). Apart from this while
calculating payback period and do not include all cash flows which sometimes give wrong
information and result to the investor. Those project which are short term in nature so payback
period do not give any guarantee that the short projects will get profit in the future.
Benefits of accounting rate of return
It is also one of the easiest ways to calculate the profit for a project apart from this it includes the
total profit and savings for the entire life of the project. This method is basically used by those
companies who have many projects to invest with the help of accounting rate of return they can
select best project for them. This method provides clear picture of revenue and profit of the
project. This method is very useful for the investors as it satisfy the need of the Investor by
providing them accurate rate of return on the investment.
Disadvantage of accounting rate of return
One of the biggest disadvantages of accounting rate of return is that it sometimes provide
different result for the same project which can provide misleading information to the investor.
Another thing is that accounting rate of return to not include time factor which is one of the
primary weakness of this method (Abdelhady, 2021). Accounting rate of return do not consider
external factors as well which can harm the profitability of the project. Apart from this
accounting rate of return do not use cash inflows which are the most important part of the
prophet. So these are the primary weaknesses of accounting rate of return.
Advantages of net present value

One of the primary advantages of net present value is that it considers time value of money to
recognise the profit of a project. Net present value determines the viability of the project. Besides
this net present value is used in decision making process of Companies because it provides
necessary information about the evolution of the project as per their size and rate of Return.
Limitations of net present value
One of the key limitations of net present value is that it cannot compare those projects which
have different sizes. As net present value believes that larger project can provide better outcome
and return as compared to shorter project therefore it do not provide information about two
different projects who are totally opposite in size.
Benefits of internal rate of return
The key benefit of internal rate of return is that it is simple to use and easy to understand. Internal
rate of return provides a snapshot of return generated on the project and helps them in the
selection of right project (Marchioni and et.al 20). Internal rate of return includes cost of capital
which is required for the investor to know the status of their project.
Disadvantage of internal rate of return
The biggest disadvantage of internal rate of return is that it does not include the project size by
comparing different projects. Apart from this it also ignore the future cost of the project. Internal
rate of return do not consider reinvestment rates.
Payback period is 4.134 years
(i) Discounted Payback period = 6.169 years
Cash flow return rate is 12.65% per year
Cash flow Net cash flow Discounted
cash flow
Net
discounted
cash flow
Year 0 -438700 -438700 -438700 -438700
Year 1 97500 -341200 86283.19 -352416.81
Year 2 102375 -238825 80174.64 -272242.17
Year 3 107493.75 -131331.25 74498.56 -197743.61
Year 4 112868.44 -18462.81 69224.33 -128519.29
Year 5 118511.86 100049.05 64323.49 -64195.80
Year 6 124437.45 224486.50 59769.61 -4426.18

Accounting rate of return
Annual revenue (a) = 123000
Annual expenses (b) = 25500
Initial investment value (c) = 438700
Number of years = 6
Average annualised investment
F= c-d/e
F = 438700-0/6
F = 73116.66
Profit
P = a-b/f
= 123000-25500/73116.66
=1.33*100
=133.35 %
ARR = P/A
=1.33/123000
0.011
ARR = 0.11%
Accounting rate of return
ARR = a/c
123000/438700
=0.28%
Net present value
Initial investment = 438700.00
Discount rate = 13.00

Particular Cash flow
Year 0 438700
Year 1 97500
Year 2 102375
Year 3 107493.75
Year 4 112868.44
Year 5 118511.86
Year 6 124437.45
t
NPV = ∑ Ct/ (1+R)t
T=0
So the net present value is 333841.90
Internal rate of return
Net present value
Initial investment = 438700.0
Particular Cash flow
Year 0 438700
Year 1 97500
Year 2 102375
Year 3 107493.75
Year 4 112868.44
Year 5 118511.86
Year 6 124437.45
Formula
=0=NPV= t

∑ Ct/ (1+IRR)t
T=0
C= cash flow at time
IRR = discount rate
T = time period
Merger and acquisition
Merger states when two and more entities who are dealing in the same business join their hands
together and become one entity. The main objective of merger is to increase the market share of
the companies along with this they want to increase their revenue and sales (Ahmad and et.al
2018). With the help of merger competition also get produces among different companies who
are selling same products. On the flip side acquisition describes the takeover of one entity by
another company. In which the acquired company have to work as per the rules and regulations
of acquiring company. Acquired company sale its all assets and liabilities to the acquiring
company. The main reason behind acquisition is that acquiring Company get best Assets of the
acquired company and can use such assets to enhance the profitability.
Price earnings ratio
Price earnings ratio commonly known as P/E Ratio. Price earnings ratio shows the share price of
the company e as compared to earnings per share of the company. The major reason behind using
plus ratio is to value the company and bring out whether it is overvalued and undervalued. The
main feature of high price earnings ratio is that it shows the over value of stock prices of the
company which help the investor to know whether the share and stock of the company will rise
in the future or not. This ratio do not provide better outcome and result to loss companies who do
not have any earning in such cases price earnings ratio do not provide better result and outcomes.
To evaluate the price earnings ratio it can be determined by dividing current share price from the
Earning per share (Bogataj and et.al 2019). This ratio is very much important for the perspective
of investor because it provides better information about the value of the company to its investor.
With the help of price earnings ratio investor can get to know what will the value of the company
and its asset be at the time of wind up. As it is very important for the investor to know is the
company profitable or not and how much return it will provide in the near future otherwise if the
complete do not perform well then all the money of the investor get vanished.
Price earnings ratio

= share price / earnings per share
4.15/29 =0.143
Discounted cash flow method
Discounted cash flow is one of the valuation methods which are used to ensure the value of an
investment which is relied on the expected future cash flow. This method bring out the value of
an investment which is available today and gives the information about the money which will
generate in the future on the investment. This discounted cash flow method helps in making
investment decision because it provides the information about the security of acquiring company
apart from there it also provides the Assets and Technology used by the acquiring company so
that acquired company also get some benefit from the acquisition. If the discount cash flows is
higher than the current cost of the project on investment this shows the positive return on the
project (Li and et.al 2017). This return is valuable for the investor and it helps them to make
appropriate decisions about the investment whether they want to invest in such company or not.
To calculate the discount cash flow companies usually considered weighted average cost of
capital to know the discount rate it also helpful for the shareholders to know the expected rate of
return. This method has some limitations as it depends on the estimation of future cash flow
which sometimes proves inaccurate or wrong.
Dividend valuation method
Dividend valuation method is used to value the stock price of a company which is best on some
theory which shows that stock price of the company is equal to its future dividend payment and
discount back of their present value. This is a quantitative method which provides accurate
outcome and result to the investor about the stock price of the company through which investor
can know what will be the future dividend they will get if they invest in a particular company. It
relies on the intrinsic value of the stock which represents the present value of all the future cash
flows which is being generated by the securities of the company (Laitinen, 2019). This method
provides a clear and easy way investor can calculate the share stock price of the company. On the
flip site this method works on some assumptions that cannot be easily forecasted by the investor.
This method provides details about the growth of dividend payment and also the cost of equity
capital. This method provides forecasting about different variables which is necessary for the
investor to know before making any kind of investment.
Problem associated with valuation technique

There are few problems which is associated with price to earnings ratio although it is helpful my
drink which gives good relations about the company’s share price. What price do i need a show
sometimes become difficult to use while comparing different companies of the industry. Is
different industries but different companies have different price to earnings ratio. Some
companies have zero P/E ratio and some have very high price to earnings ratio. With the help of
price to earnings ratio it can be known which stocks are cheap and which is blue chip in nature so
as per the prices of stocks investor can made their decisions. P/ E ratio provides a benchmark to
the investor about the company and its stock prices. It can be fluctuate and there is a possibility
that the stock do not fluctuate as per the P/E ratio so these are the limitations of this ratio.
Problems of discounted cash flow method
Discounted cash flow also has some problems as it works on certain assumptions. It may provide
uncertainty in providing terminal value to the company or the investor. Sometimes discounted
cash flow method does not provide projected growth about the project so the investor and
company may face loss and difficulties (Gajek. and et. al 2017). Discounted cash flow method
also uses weighed average cost of capital which makes the process lengthy. Apart from this,
another issue which is being held in discounted cash flow is that it works on large number of
assumptions which can impact the overall return on the investment. Chances of having errors are
also high in case of discounted cash flow. Besides this, it provides high detail about the outcome
and results which will bring issues to the investor. Apart from this discounted cash flow do not
look at the competitors which are a major disadvantage of this method.
Problems of dividend valuation method
The downside of this models us that it does not provide accurate projection about the investment.
The reason behind this is that dividend valuation method do not includes buy back factor. This
method can only used by such companies who dividend growth is high and declares dividend to
its investors on real time (Nie, 2018). Another issue which is present in this model is that it have
very limited use, only blue chip companies can use this model to know the dividend details and
information. Mostly high growth companies uses this model because they have many upcoming
opportunities in the near future however investor also wants to invest in those companies who
provide better dividend. The next key limitation of this method is that sometimes it do not relate
the earning, if the earning of any company is high then it must provide high dividend to its

investors but many times it happens where companies do not declare dividend even though they
earn profit.
Conclusion
From the above report it can be concluded that it provides details about financial management.
Apart from this, it gives details about IRR, NPV, Payback period etc. These reports discuss
discounted cash flow method and dividend method to provide correct details to the investor.
References
Books and Journals
Abdelhady, S., 2021. Performance and cost evaluation of solar dish power plant: sensitivity
analysis of levelized cost of electricity (LCOE) and net present value (NPV). Renewable
Energy. 168. pp.332-342.
Ahmad and et.al 2018. Molecular identification and pathological characteristics of NPV isolated
from Spodopteralitura (Fabricius) in Pakistan.
Atmadja and et.al 2018. Determinant factors influencing the accountability of village financial
management. Academy of Strategic Management Journal.17(1).pp.1-9.
Bogataj and et.al 2019. NPV approach to material requirements planning theory–a 50-year
review of these research achievements. International Journal of Production
Research. 57(15-16), pp.5137-5153.
Brigham and et.al 2021. Fundamentals of financial management. Cengage Learning.

Bulturbayevich and et.al 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development.5(4). pp.5-
5.
Crespo and et.al 2019. Pump-as-turbine selection methodology for energy recovery in irrigation
networks: Minimising the payback period. Water. 11(1). p.149.
Gajek, L. and Kuciński, Ł., 2017. Complete discounted cash flow valuation. Insurance:
Mathematics and Economics. 73.pp.1-19.
Laitinen, E.K., 2019. Discounted Cash Flow (DCF) as a Measure of Startup Financial
Success. Theoretical Economics Letters.9(08).p.2997.
Li and et.al 2017. Pricing and lot-sizing policies for perishable products with advance-cash-credit
payments by a discounted cash-flow analysis. International Journal of Production
Economics. 193. pp.578-589.
Loke, Y.J., 2017. The influence of socio-demographic and financial knowledge factors on
financial management practices of Malaysians. International Journal of Business and
Society. 18(1).
Marchioni and et.al 2018. Investment decisions and sensitivity analysis: NPV-consistency of
rates of return. European Journal of Operational Research. 268(1). pp.361-372.
Wijesuriya and et.al 2017. Reduction of solar PV payback period using optimally placed
reflectors. Energy Procedia.134. pp.480-489.
Nie, Z.Q., 2018. Discounted cash flow (DCF) model detection based on goodwill impairment
test. Journal of Discrete Mathematical Sciences and Cryptography. 21(4). pp.959-968.