Financial Performance Analysis of GlaxoSmithKline, AstraZeneca and Shire PLC

This report analyzes the financial performance of GlaxoSmithKline, AstraZeneca and Shire PLC using 10 financial ratios and 2 non-financial ratios. It identifies the best and worst performing companies and provides recommendations for improvement. The report also explains the key stages in the capital investment decision-making process and the role of investment appraisal in the process.

ACCOUNTING FOR MANAGERS
TABLE OF CONTENT

S
Section A....................................................................................................................................1
Question 1...............................................................................................................................1
a) Select and justify 10 financial ratios and 2 non-financial ratios in analyzing the financial
performance of the three companies.......................................................................................1
b) Identify the best performing company and state the reasons if the company would be
consider as a positive investment opportunity......................................................................17
c) Identify worst performing company and discuss the recommendations of how the
financial performance of the firm can be improved.............................................................18
Section B..................................................................................................................................18
Question 2................................................................................................................................18
a) Identify and explain the key stages in the capital investment decision-making process
and the role of investment appraisal in the process..............................................................18
b) Identify and explain the main methods of investment appraisal used in practice with the
help of numerical examples..................................................................................................21
REFERENCES.........................................................................................................................26

SECTION A
Question 1
a) Select and justify 10 financial ratios and 2 non-financial ratios in analyzing the financial
performance of the three companies.
GlaxoSmithKline Plc
Particulars Formula 2015 2016 2017
Profitability
Sales
2392
3
2788
9 30186
GP
1507
0
1859
9 19844
Gross Profit Ratio GP/Sales*100 63% 67% 66%
Operating profit 2628 6026 6061
Operating profit
ratio Operating Profit/Sales*100 11% 22% 20%
Net profit 8422 912 1532
Net profit Ratio Net profit/sales*100 35% 3% 5%
Total assets
5344
6
5908
1 56381
Return on assets 0.158 0.015 0.027
Stockholder’s equity 5114 1124 -68
Return on Equity Net profit/Stockholder's equity 0.16 0.02 0.03
Liquidity ratios
Current assets
1658
7
1671
1 15907
Current liabilities
1341
7
1900
1 26569
Current ratio Current assets/current liability 1.24 0.88 0.60
Inventory 4716 5102 5557
Quick ratio
(current assets-inventory)/current
liabilities 0.88 0.61 0.39
Gearing ratios
Long term debt
1527
7
1462
0 14221
Equity capital 5114 1124 -68
Gearing ratio Long term debt/equity capital 2.99 13.01
-
209.13
Investing Ratios
Sales
2392
3
2788
9 30186
Total assets
5344
6
5908
1 56381
Asset turnover ratio Sales/total assets 0.45 0.47 0.54
Share performance ratios
Net income 8422 912 1532
No. of outstanding shares 1340 1342 1343
1

Earnings per share Net income/no. of outstanding shares 6.29 0.68 1.14
Source: GSK, 2017
2015 2016 2017
GP 63% 67% 66%
Operating Profit 11% 22% 20%
NP 35% 3% 5%
2015 2016 2017
0%
10%
20%
30%
40%
50%
60%
70%
GLAXOSMITHSKLINE
GP
Operating Profit
NP
Higher gross profit is due to lower cost of goods sold and higher sales earned by the
firm in all the three years due to good marketing of the company’s products. Operating
expenses of this enterprise are higher which decreases the operating profit and so as for the
net profit.
2015 2016 2017
Return on assets 0.158 0.015 0.027
Return on equity 0.16 0.02 0.03
2

2015
2016
2017
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16
Return on equity
Return on assets
In 2015, return on equity is higher than the return on assets which further decreased
till 2017 due to decreasing earnings of an entity.
2015 2016 2017
Current ratio 1.24 0.88 0.6
Quick Ratio 0.88 0.61 0.39
2015 2016 2017
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Current ratio
Quick Ratio
The position of both the ratios are not good as this ratio shows neck to neck position
but its performance is declining at the same time due to higher current liabilities (Ratio
analysis, 2017).
2015 2016 2017
Gearing Ratio 2.99 13.01 -209.31
3

2015 2016 2017
-250
-200
-150
-100
-50
0
50
Gearing Ratio
Gearing Ratio
A negative and decreasing result of the gearing ratio is due to the higher burden of the
long-term debt on an entity in comparison with the available equity held by an entity.
2015 2016 2017
Asset turnover 0.45 0.47 0.54
2015
2016
2017
0 0.1 0.2 0.3 0.4 0.5 0.6
Investing ratio
Asset turnover
Investing ratios of an entity is ascertained by determining the asset turnover of the
company for all the three years in determining the actual position of the firm is increasing.
2015 2016 2017
Earnings per share 60.29 0.68 1.14
4

2015
2016
2017
0 10 20 30 40 50 60 70
SHARE PERFORMANCE RATIO
Series2
Earning per share
The poor performance of GlaxoSmithKline is due to decreased net income of an
entity which is clearly visible with the help of this bar chart. This needs to be improved by
increasing the sources of income.
ASTRAZENECA PLC
Particulars Formula 2015 2016 2017
Profitability
Sales 24708 23002 22465
GP 20062 18876 18147
Gross Profit Ratio GP/Sales*100 81% 82% 81%
Operating profit 2614 3572 2157
Operating profit
ratio Operating Profit/Sales*100 11% 16% 10%
Net profit 2825 3499 2868
Net profit Ratio Net profit/sales*100 11% 15% 13%
Total assets 60124 62526 63354
Return on assets Net profit/total assets 0.047 0.056 0.045
Stockholder’s equity 18490 14854 14960
Return on Equity Net profit/Stockholder's equity 0.05 0.06 0.05
Liquidity ratios
Current assets 16007 13262 13150
Current liabilities 14869 15256 16383
Current ratio Current assets/current liability 1.08 0.87 0.80
Inventory 2143 2334 3035
Quick ratio
(current assets-inventory)/current
liabilities 0.93 0.72 0.62
Gearing ratios
Long term debt 14137 14495 15560
5

Equity capital 18490 14854 14960
Gearing ratio Long term debt/equity capital 0.76 0.98 1.04
Investing Ratios
Sales 24708 23002 22465
Total assets 60124 62526 63354
Asset turnover ratio Sales/total assets 0.41 0.37 0.35
Share performance ratios
Net income 2825 3499 2868
No. of outstanding shares 316 316 317
Earnings per share Net income/no. of outstanding shares 8.94 11.07 9.05
Source: AstraZeneca, 2017
2015 2016 2017
GP 81% 82% 81%
Operating Profit 11% 16% 10%
NP 11% 15% 13%
2015 2016 2017
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
PROFITABILITY of ASTRAZENECA
GP
Operating Profit
NP
Except for gross profit, operating profit and the net profit of the company is
showing stable and decreased return which is not fruitful for the company as the market
competition is severe. Gross profit is higher due to the controlled cost of goods sold of an
entity.
2015 2016 2017
Return on assets 0.047 0.056 0.045
Return on equity 0.05 0.06 0.05
6

2015
2016
2017
0 0.01 0.02 0.03 0.04 0.05 0.06
PROFITABILITY RATIOS
Return on equity
Return on assets
Increasing returns shows the efforts applied by an entity in accomplishing all its goals
and the objectives by considering all the pros and cons of the company to respect the shorter
deadlines given by the client.
2015 2016 2017
Current ratio 1.08 0.87 0.8
Quick Ratio 0.93 0.72 0.63
2015
2016
2017
0 0.2 0.4 0.6 0.8 1 1.2
LIQUIDITY RATIOS
Quick Ratio
Current ratio
Both the current ratio and the quick ratio of the company is decreasing slightly from
one period to another due to the imposition of current and the quick liabilities of an entity.
The burdens of liabilities need to decrease by keeping track of all these in advance (Working
capital, 2017).
7

2015 2016 2017
Gearing Ratio 0.76 0.98 1.04
2015 2016 2017
0
0.2
0.4
0.6
0.8
1
1.2
ASTRAZENECA
Gearing Ratio
Gearing ratio of AstraZeneca is depicting its uniqueness by showing a positive plus
increasing return from one period to another reflects the hard work of the company in front of
its external users.
2015 2016 2017
Asset turnover 0.41 0.37 0.35
2015
2016
2017
0.31 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.4 0.41
Investing ratio
Asset turnover
8

The investing ratio trend is like a staircase which is reducing from top to the bottom
position depicts the deficiency of the firm in achieving its returns within a stipulated
deadline. This is due to higher assets and lower net income of an entity.
2015 2016 2017
Earnings per share 8.94 11.07 9.05
2015
2016
2017
0 2 4 6 8 10 12
Share performance ratio
Earning per share
The highest earning share of AstraZeneca is marked in the year 2016 due to higher net
income of the company as compared to other years such as 2015 and 2017 where returns are
in stable position.
SHIRE PLC
Particulars Formula 2015 2016 2017
Profitability
Sales 6417 3865 4865
GP 5448 -3817 -4701
Gross Profit Ratio GP/Sales*100 85% -99% -97%
Operating profit 1543 -9445
-
11763
Operating profit
ratio Operating Profit/Sales*100 24%
-
244% -242%
Net profit 1338 604 4254
Net profit Ratio Net profit/sales*100 21% 16% 87%
Total assets 16610 67035 67757
Return on assets Net profit/total assets 0.081 0.009 0.063
Stockholder’s equity 9829 28948 36176
Return on Equity Net profit/Stockholder's equity 0.08 0.01 0.06
Liquidity ratios
9

Current assets 2256 7540 7608
Current liabilities 3706 7743 7882
Current ratio Current assets/current liability 0.61 0.97 0.97
Inventory 635 3562 3292
Quick ratio
(current assets-inventory)/current
liabilities 0.44 0.51 0.55
Gearing ratios
Long term debt 70 19553 16411
Equity capital 9829 28948 36176
Gearing ratio Long term debt/equity capital 0.01 0.68 0.45
Investing Ratios
Sales 6417 3865 4865
Total assets 16610 67035 67757
Asset turnover ratio Sales/total assets 0.39 0.06 0.07
Share performance ratios
Net income 1338 604 4254
No. of outstanding shares 59 59 81
Earnings per share Net income/no. of outstanding shares 22.68 10.24 52.52
Source: Shire, 2017
2015 2016 2017
GP 85% -99% -97%
Operating Profit 24% -244% -241%
NP 21% 16% 87%
2015 2016 2017
-300%
-250%
-200%
-150%
-100%
-50%
0%
50%
100%
150%
SHIRE PLC
GP
Operating Profit
NP
Profitability position of Shire plc is not good as the gross profit of an entity is
showing negative results after the year 2015 that depicts the burden of costs of goods sold on
an entity (Lee, Lin and Shin, 2018). Operating results is increases as shire plc has control
10

over its operating expenses. Net profit of the firm is excessively negative due to the immense
pressure of the taxation of the country.
2015 2016 2017
Return on assets 0.081 0.009 0.063
Return on equity 0.08 0.01 0.07
2015
2016
2017
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
Return on equity
Return on assets
Return on equity and assets shows the involvement of internal business components in
creating higher returns in the external market. This shows the importance of an entity’s skills
in creating a special place for an enterprise among its existing market rivals. In the year 2015,
both returns on equity and assets show stabilizing position which decreases in 2016 and again
increases in 2017 which in total shows fluctuating trend.
2015 2016 2017
Current ratio 0.61 0.97 0.97
Quick Ratio 0.41 0.51 0.55
11

2015 2016 2017
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Current ratio
Quick Ratio
Liquidity is essential for a business in taking lead in a competition as a business runs
on a credit which requires working capital to pay off daily expenses. The current ratio is
increasing year by year from 2015 to 2017 as the current assets are higher in comparison to
the current liabilities. On another hand, quick ratio is also increasing but lesser as against to
the current ratio. This shows the influence of the inventory in the current assets as quick ratio
shows the absence of inventory in a current asset group.
2015 2016 2017
Gearing Ratio 0.01 0.68 0.45
2015
2016
2017
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Gearing Ratio
Gearing Ratio
Gearing ratio compares the long-term debt with the available equity held by an entity
to meet the interest payable on the debentures and bank loan in the form of debt taken by an
12

entity (Rodrigues and Rodrigues, 2018). It shows the calibre of a firm in paying off its debt
on time. In the first year, Shire plc is not able to meet its debt but in the next year the firm
outperforms and clear its entire previous debt burden but in the year 2017 the performance of
the firm slightly decreases due to a higher dividend paid to the shareholders.
2015 2016 2017
Asset turnover 0.39 0.06 0.07
2015
2016
2017
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4
Investing ratio
Asset turnover
Asset turnover shows the utilization of assets of an entity in generating the final
outcomes of an enterprise. The bar chart shows the decreasing returns from 2015 to 2017 in a
descending order. Higher returns booked in the initial year of 2015 which further decreases in
the year 2016 and then in 2017 due to a lower amount of assets held by Shire plc.
2015 2016 2017
Earnings per share 22.68 10.24 52.52
13

2015 2016 2017
0.00
10.00
20.00
30.00
40.00
50.00
60.00
SHARE PERFORMANCE RATIO
Earning per share
Earning per share is a medium used to reflect the fluctuating market trend of stock
market earrings of an entity by showcasing its external market position on attracting its
external as well as the internal clients (Mo, and et. al., 2018). The above figures show the
increasing position of earnings from 2015 to 2017 due to higher net profits.
Non financial ratio
GlaxoSmithKline
Particulars 2015 2016 2017
Net profit 8422 912 1532
Number of employees 43021 42479 40934
Profit per Employee 20% 2% 4%
Total assets 53446 59081 56381
Assets per employee 1.24 1.39 1.38
2015 2016 2017
Profit per Employee 20% 2% 4%
14

2015 2016 2017
0%
5%
10%
15%
20%
25%
GLAXOSMITHKLINE
Profit per Employee
2015 2016 2017
Asset per employee 1.24 1.39 1.38
2015 2016 2017
1.15
1.2
1.25
1.3
1.35
1.4
GLAXOSMITHKLINE
Asset per employee
AstraZeneca
Particulars 2015 2016 2017
Net profit 2825 3499 2868
Number of employees 59700 66481 298272
Profit per Employee 5% 5% 1%
Total assets 60124 62526 63354
Assets per employee 1.01 0.94 0.21
Source: GSK number of employees, 2017
15

2015 2016 2017
Profit per Employee 5% 5% 1%
2015
2016
2017
0% 1% 2% 3% 4% 5%
Profit per Employee
Profit per Employee
2015 2016 2017
Asset per employee 1.01 0.94 0.21
2015
2016
2017
0 0.2 0.4 0.6 0.8 1 1.2
ASTRAZENECA
Asset per employee
Shire
Particulars 2015 2016 2017
Net profit 1338 604 4254
Number of employees 22000 10268 718926
Profit per Employee 6% 6% 1%
Total assets 16610 67035 67757
Assets per employee 0.76 6.53 0.09
16

2015 2016 2017
Profit per Employee 6% 6% 1%
2015
2016
2017
0% 1% 2% 3% 4% 5% 6%
SHIRE
Profit per Employee
2015 2016 2017
Asset per employee 0.76 6.53 0.09
2015 2016 2017
0
1
2
3
4
5
6
7
SHIRE
Asset per employee
b) Identify the best performing company and state the reasons if the company would be
consider as a positive investment opportunity.
On the basis of the results of the ratio analysis, it has observed that AstraZeneca is a
best-performing company as compared to GlaxoSmithKline and Shire plc as all these three
17

companies are of pharmaceutical companies. AstraZeneca is considered as positive
investment opportunities in the future due to various reasons are given below:
 Higher earnings per share of the company open up the path for increasing the
stock returns on the London stock exchange to avail the market volatility.
 Increasing net income is utilized in investing in different sources of investments
c) Identify worst performing company and discuss the recommendations of how the financial
performance of the firm can be improved
Shire Plc is proved as a worst performing company whose results in the form of
financial ratios are decreasing from one period to another. Following are the reasons which
prove that this company is considered as a negative investment opportunity for an individual
or an entity is given as below:
 Decreased profitability of the company will not attract an investor towards this
firm as this entity will not able to pay off the interest of investors due to its low profit.
 Higher debt burden reflects the gearing performance of the firm
SECTION B
QUESTION 2
a) Identify and explain the key stages in the capital investment decision-making process and
the role of investment appraisal in the process.
Before considering any project, an entity uses capital appraisal techniques to select
the most desirable project which generates higher profit in the future. The capital budgeting
technique plays a significant role for an entity in prioritizing among the different projects that
produce higher returns as compared to all other projects evaluated by an entity. For the
growth of the business, the investment plays a significant role as the owner of a business
emphasizes on expanding its existing business by utilizing its own efforts to get the lead in its
business (Giustinelli and Manski, 2018). There are various techniques of the capital appraisal
or economic appraisal techniques whose aim is to increase the profitability of a project by
considering the existing skills of a project to beat its competitors existing in a similar market.
Various methods of the capital appraisal help to achieve all the desired aims and the
objectives within a stipulated time period with a motive to improve its image in front of it's
internal as well as the external users. It includes payback period, net present value,
accounting rate of return, internal rate of return. All these approaches belong to different
concepts in determining the future profitability in advance in alerting the clients before
18

stepping ahead in the investment market (Bridge and Dodds, 2018). A risk of the whole
investment market is conveyed to the clients with the help of all these methods. An individual
or group of individuals is required to follow a procedure of capital investment decision which
is given below:
Identification of a project
The first and the foremost step in the capital investment decision is to search for all
the projects available in the market that generates higher returns for an entity or an individual
on selection. Different projects are there which fulfils the needs of a person such as a project
for newly equipped machines and replacing decision by eliminating old machines held in a
business, exclusive and the inclusive investment decisions. Before taking the investment
decisions, an individual seeks various criteria’s in selecting the best suitable project which
meets all the criteria’s in order to be called as the most desirable and suitable project (Lefley
and Sarkis, 2018). Various criteria’s uses by an individual include budget or cost of a project,
the rate of return used to discount the present cash flows in determining the future
profitability of a concern project. An initial cost of the project is used as an integral factor in
ascertaining the future profitability by comparing this with the present value of the cash flows
which is discounted at a specific rate of return. An individually initially observes the initial
capital and the cash flows generated from a project in the overall years of a project to
consider the same in comparison with all other projects available in the market for selection.
Defining of a project
In this stage, the project is defined in detail to guide an investor whether to select or
reject the project by creating different selection measures to tests the entire performance of a
project. The aim of an individual is to select the most suitable project which meets all the
criteria’s develops by an entity for the betterment of an entity. Detailed defining of a project
includes the financial as well as non-financial components of a project to help a user in
considering the same for the future purpose as their aim is to positively influence all its users
whether directly or indirectly associated with its business (Berechman, 2018). Employees are
the internal users of an entity who represents the company in front of the external parties,
which is essential to be satisfied with the services offers by an enterprise as this satisfaction
will further reflect in attracting the clients towards the firm. The owner of the business will
involve all the employees and other internal users of its firm in this decision and consider
their opinions whether to select or reject the project will help in maintaining the image of the
19

firm among its users. This decision of an entity owner helps in stealing the attention of
external investors and the shareholders to take the active interest in the proceedings of a
business.
Analysing the project
This is the third stage of the capital appraisal process, under which an entity will
evaluate the shortlisted projects by an entity by discussing its advantages and the
disadvantages to consider the best suitable projects for the betterment of an enterprise. In the
analysis stage, all the measures created by an entity in the above two steps are clubbed
together in testing the overall performance of a project as this project is feasible enough in
generating the higher returns or not. Alternatives are identified in context to the shortlisted
project for backup as if these projects are rejected then all the alternatives will uses by an
entity for generating better results for the company (Asmussen, Kristensen and Wæhrens,
2018). The motive of an enterprise is to attract all the parties towards the business in building
a strong base of customers by delivering quality oriented services to all its users. In this
segment, an entity will analyze all the risks involved in this project by prioritizing among all
the risks by knowing its severity as the identified risks are categorized into three levels. These
three levels of the risks include low, medium and high as these criteria’s depicts the
likelihood of occurring the risks in this project along with its effect on an entity. The risk is a
un-favorable component which needs to be identified by an individual in the present stage top
avoid future problems easily as this may lead to the deterioration of the established image of
the business concern in front of all the internal as well as the external users of an enterprise.
Monitoring
After identifying the positive and the negative outcomes from all the evaluated
projects by an entity, shortlisted on the basis of crafted measures by an enterprise. Measures
are crafted by an entity to test the overall performance of a business in the form of investment
made by an entity in various bonds, lands, machinery and many more as according to the
existing nature of an entity. Investing abilities of an entity are checked throughout this
procedure which helps an individual or a group of individuals in moving the head in grabbing
lots of market opportunities (Zhao and Yang, 2018). Monitoring is one of the important
functions of management in which shortlisted and the evaluated projects are taken care to
select the most desirable projects which meets the needs and higher expectations of a market.
The negative or positive traits of a project are tested through the pilot testing survey in which
20

the actual reality of all these projects is identified to take the best suitable investment
decisions by an entity within a stipulated time period.
Post audit
Last stage of the capital investment decision process is considered as the most crucial
stage which helps in deciding the final selection or rejection of a project by an enterprise. The
result of the monitoring stage includes the positive or negative reactions of the general public
in pursuance of the evaluated projects to help an entity in selecting the best suitable projects
by an enterprise. Time plays a significant role in considering the best suitable project out of
the available projects in the market (Shahab, Ye, Riaz and Ntim, 2018). A project which
posses lesser risks, costs and which generates returns in the lesser time period is considered
by an individual Nowadays, time acts an integral source of competition in a market as
delivering quality oriented services before the stipulated deadline helps an entity in beating
all its existing competitors. This actor will create a benchmark for its potential rivals in a
market to increase its productivity to create a competitive spirit like an entity in the overall
market.
b) Identify and explain the main methods of investment appraisal used in practice with the
help of numerical examples.
Different methods of the capital appraisal or economic appraisal methods includes net
present value method, internal rate of return, payback period, average accounting rate of
return methods which is based on the different concepts used to evaluated all the available
project in order to prioritize the project to consider the best suitable projects out of the total
project held for use by an individual (Marx and Turner,2018). Variability of the methods
helps an entity in selecting the suitable projects easily by seeking all the components in the
shortlisted projects. There are different kinds of capital investment decisions methods which
are given as below:
Payback period- This method is a traditional approach of the capital investment decision or
economic appraisal method in which time factor of a future generated returns are considered
as a comparison factor among all the available projects held for selection in a market. In this
approach, a project is selected or rejected on the basis of returns generated in the lower time
period among the projects which are compared with each other (Yang, 2018). A project
which generates the overall costs of the project through its cash flows in a specific period will
consider as the generation of future returns in that particular period. A disadvantage of this
21

method is that it disregards all the cash flows after achievement of the goal as returns
generated after recovering the initial capital of the project is not considered in selecting the
project.
Year Project X Cumulative cash flows
Initial investment 400000 -400000
1 $ 120,000.00 $ (280,000.00)
2 $ 150,000.00 $ (130,000.00)
3 $ 180,000.00 $ 50,000.00
4 $ 185,000.00 $ 235,000.00
5 $ 190,000.00 $ 425,000.00
6 $ 220,000.00 $ 645,000.00
Payback period 2.77
Year Project Y Cumulative cash flows
Initial investment 400000 -450000
1 $ 100,000.00 $ (350,000.00)
2 $ 160,000.00 $ (190,000.00)
3 $ 185,000.00 $ (5,000.00)
4 $ 195,000.00 $ 190,000.00
5 $ 220,000.00 $ 410,000.00
6 $ 260,000.00 $ 670,000.00
Payback period $ 3.03
Net present value- Net present value method is based on the concept of the time value of
money which is a concept which helps in ascertaining the future in advance in the present
period. Discounting rate of return is used to determine the present value of the cash flows of
an enterprise. This approach aims to identify the profitability of a project in the present period
by applying the concept of time value of money which helps a user in guiding how much
money to invest by an investor in the present time (Zheng, He,Wang and Jia, 2018). Initial
cost of the project is compared with the present value of the cash flows of the project to know
the amount of net present value of a project. Positive and higher net present value of a project
22

is consider by an entity in selecting or rejecting a particular project out of all other projects
held available for use.
Year Project X
Discounted
Factor
@12% DCF Project Y
Discounted
Factor
@12% DCF
Initial
investment 400000 450000
1
$
120,000.00 0.893
$107,160.0
0
$
100,000.00 0.893 89300
2
$
150,000.00 0.797
$119,550.0
0
$
160,000.00 0.797 127520
3
$
180,000.00 0.712
$128,160.0
0
$
185,000.00 0.712 131720
4
$
185,000.00 0.567
$104,895.0
0
$
195,000.00 0.567 110565
5
$
190,000.00 0.507
$
96,330.00
$
220,000.00 0.507 111540
6
$
220,000.00 0.452
$
99,440.00
$
260,000.00 0.452 117520
Present
value
$655,535.0
0
$
688,165.00
Less:
Initial
investment 400000 450000
NPV
$255,535.0
0
$
238,165.00
Internal rate of return- This concept is similar like a break even concept in which an entity
identifies a specific rate of return at which the overall costs of the project gets zero. This
shows the shutdown point of the business as just achieving the costs o the project us not aim
of an entity as they intends to accomplish the profitable goals along with the recovery of the
initial capital applied on a project. The returns of a project surpasses the initial capital applied
in the project will results to higher returns for an enterprise will increases the image of the
firm in front of its external and the internal users who gets satisfied when they get their
salary, return and investor’s interest on time to keep satisfied with the services and quality
oriented products offers by an entity to all its users on within a short span of time (Lefley,
2018). A projected is selected when the internal rate of return is higher than the rate of return
23

used by an entity as this will results into higher profits otherwise will only meet the overall
capital applied by an entity in the initial project in the form of capital of strengthening the
overall project.
Year Project X Project Y
Initial investment -400000 -450000
1 $ 120,000.00 $ 100,000.00
2 $ 150,000.00 $ 160,000.00
3 $ 180,000.00 $ 185,000.00
4 $ 185,000.00 $ 195,000.00
5 $ 190,000.00 $ 220,000.00
6 $ 220,000.00 $ 260,000.00
IRR 33% 29%
Average accounting rate of return- This approach is only emphasizes on the generation of a
profit from a project without considering any other features of a project. Average profit
produces by a project is counted in assessing the productivity of a project. The rate of return
of this method should be higher as compared to the exiting rate of return of a project (Piel,
Humpert and Breitner, 2018). The higher rate of return of a project reflects the higher
generating of profits which is clearly indicates the decreasing costs involved in a project is a
favourable condition for an entity. Disadvantage of this approach is that this considers only
profit of a project rather than considering all other feature of project in selecting the most
desirable project which generates fruitful results for an enterprise within a stipulated time or
not.
Year Project X Project Y
Initial investment 400000 450000
1 $ 120,000.00 $ 100,000.00
2 $ 150,000.00 $ 160,000.00
3 $ 180,000.00 $ 185,000.00
4 $ 185,000.00 $ 195,000.00
5 $ 190,000.00 $ 220,000.00
6 $ 220,000.00 $ 260,000.00
24

Average profit $ 174,166.67 $ 186,666.67
ARR 44% 41%
25

REFERENCES
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Shahab, Y., Ye, Z., Riaz, Y. and Ntim, C.G., 2018. Individual’s financial investment
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