Investment Appraisal and Valuation Techniques

The provided document is a comprehensive study on investment appraisal methods, focusing on their applications in various industries. It presents a detailed breakdown of different valuation techniques, such as net realizable value, physical measure, and gross profit margin. The document also includes references to relevant research papers and studies, demonstrating the practical application of these methods in managing costs, risks, and investments.

Running head: FUNDAMENTALS OF INVESTING
Fundamentals of Investing
Name of the Student:
Name of the University:
Authors Note:

FUNDAMENTALS OF INVESTING
1
Table of Contents
Question 1:.................................................................................................................................2
1. Calculating Net present value method and a required rate of return of 8% to determine,
which project should the Company accepted:............................................................................2
2. Calculating payback period for each project and depicting which project should be
accepted by the company:..........................................................................................................3
Question 2:.................................................................................................................................5
1. Sketching cash inflow and outflow of different options presented by the production
manager:.....................................................................................................................................5
2. Calculating net present value of different options and make recommendations for the
company:....................................................................................................................................6
Question 3:.................................................................................................................................7
1.a Allocating joint cost of the two products soda and chlorine with the help of sales value at
split off method:.........................................................................................................................7
1.b Allocating joint cost of the two products soda and chlorine with the help of physical
measure method:........................................................................................................................8
2. Allocating joint cost of the two products soda and chlorine with the help of net realizable
method:.......................................................................................................................................8
3. Depicting the gross margin for each product under each of the three methods:....................9
Reference and Bibliography:....................................................................................................10

FUNDAMENTALS OF INVESTING
2
Question 1:
1. Calculating Net present value method and a required rate of return of 8% to
determine, which project should the Company accepted:
Year Project A Discounting rate PV
0 (11,000.00) 1.00 (11,000.00)
1 1,000.00 0.93 925.93
2 2,000.00 0.86 1,714.68
3 3,000.00 0.79 2,381.50
4 4,000.00 0.74 2,940.12
5 5,000.00 0.68 3,402.92
NPV 365.14
Year Project B Discounting rate PV
0 (11,000.00) 1.00 (11,000.00)
1 5,000.00 0.93 4,629.63
2 4,000.00 0.86 3,429.36
3 3,000.00 0.79 2,381.50
4 2,000.00 0.74 1,470.06
5 1,000.00 0.68 680.58
NPV 1,591.12
The overall calculation of NPV mainly helps in identifying the financial viability of
the project, which could help in improving financial improvements of the company. The use

FUNDAMENTALS OF INVESTING
3
of NPV valuation could helpful in detecting financial viability of the project and allow
management to make adequate investment decisions. From the overall valuation of NPV the
overall financial viability of Project B can be identified, as it portrays the higher net present
value. However, the required rate of return of 8% mainly helps in depicting the financial
performance of the project, which in turn helps in discounting the cash inflow. This
discounting measure has mainly allowed the company to detect that project B could provide a
NPV of 1,591.12, while project A provides 365.14 value. Hence, it could be understood that
using project B would allow the firm to increase its value in future and generate high level of
returns from investment. In addition, the cash flow of project B is relevantly at the levels,
which help in reducing the negative impact of inflation and time value on its returns. In this
context, Almarri & Blackwell (2014) argued that NPV valuation mainly reduces its friction
when the company does not accurately use discounting rate to evaluate financial viability of
the project.
2. Calculating payback period for each project and depicting which project should be
accepted by the company:
Year Project A Cum-Cashflow
0 (11,000.00) (11,000.00)
1 1,000.00 (10,000.00)
2 2,000.00 (8,000.00)
3 3,000.00 (5,000.00)
4 4,000.00 (1,000.00)
5 5,000.00 4,000.00
Payback period 4.20

FUNDAMENTALS OF INVESTING
4
Year Project B Cum-Cashflow
0 (11,000.00) (11,000.00)
1 5,000.00 (6,000.00)
2 4,000.00 (2,000.00)
3 3,000.00 1,000.00
4 2,000.00 3,000.00
5 1,000.00 4,000.00
Payback period 2.67
In addition, from the overall payback period valuation the company can identify the
project, which could quickly pay its investment value. In addition, the payback period
calculation mainly indicate that project B needs least years to payback the initial investment
amount. However, project A mainly needs 4.2 years for paying back the initial amount, while
predict B needs 2.7 years to payback the value. This relevant increment in payback period
value of project B is identified from the high cash inflow, which is provided by the project.
However, project A does not provide the relevant cash inflow that could provide high
payback of the initial investment. Therefore, from the evaluation and restriction of the
organisation, project B should be chosen, as it falls below the required of 3 years of payback
period value. Baum & Crosby (2014) argued that payback period does not evaluate the time
value of income, which does not reduce the negative impact of inflation rate.

FUNDAMENTALS OF INVESTING
5
Question 2:
1. Sketching cash inflow and outflow of different options presented by the production
manager:
Option 1
Particulars 2019 2020 2021 2022 2023
Sales units 60,000 65,000 70,000 80,000 90,000
Sales price 105 110 116 122 128
Cash inflow 6,300,000 7,166,250 8,103,375 9,724,050 11,486,534
Cash outflow - - (400,000) (1,200,000) (2,000,000)
Total cash inflow 6,300,000 7,166,250 7,703,375 8,524,050 9,486,534
Option 2
Particulars 2018 2019 2020 2021 2022 2023
Sales units 60,000 65,000 70,000 80,000 90,000
Sales price 105 110 116 122 128
Cash inflow 6,300,000 7,166,250 8,103,375 9,724,050 11,486,534
Cost of equipment (25,000,000)
Annual operating cost (3,000,000) (3,000,000) (3,000,000
)
(3,000,000) (3,000,000)
Salvage value 2,000,000
Total cash inflow 3,300,000 4,166,250 5,103,375 6,724,050 10,486,534
Option 3

FUNDAMENTALS OF INVESTING
6
Particulars 2018 2019 2020 2021 2022 2023
Sales units 60,000 65,000 70,000 80,000 90,000
Sales price 105 110 116 122 128
Cash inflow 6,300,000 7,166,250 8,103,375 9,724,050 11,486,534
Equipment cost (35,000,000)
Operating cost (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)
Salvage value 10,000,000
Total cash inflow 4,300,000 5,166,250 6,103,375 7,724,050 19,486,534
2. Calculating net present value of different options and make recommendations for the
company:
Option 1
Particulars 2019 2020 2021 2022 2023
Total cash inflow 6,300,000 7,166,250 7,703,375 8,524,050 9,486,534
Discounting rate 10%
NPV 29,149,885.17
Option 2
Particulars 2019 2020 2021 2022 2023
Total cash inflow 3,300,000 4,166,250 5,103,375 6,724,050 10,486,534
Discounting rate 10%
NPV (3,618,647.78)

FUNDAMENTALS OF INVESTING
7
Option 3
Particulars 2019 2020 2021 2022 2023
Total cash inflow 4,300,000 5,166,250 6,103,375 7,724,050 19,486,534
Discounting rate 10%
NPV (4,860,490.43)
From the overall evaluation of all the three options it could be identified that option
1is the most viable measure, which is been proposed by the production manager. This
measure has the highest value NPV, as the outflow from the production is relatively low. In
addition, the options mainly increase the overall value of investment, as cash inflow of the
organisation is relatively high. The NPV value of other options is relatively negative, which
indicates that the company will not get adequate return from investment. Furthermore, using
option 1 could eventually help the Red Rose Company to generate high level of income from
investment. Crosby & Henneberry (2016) mentioned that with the help of NPV valuation
adequate projects are identified, which could help in improving financial performance of the
company. In this context, Gotze, Northcott & Schuster (2016) further stated that discounting
rate are mainly the required rate of minimum return, which is needed by the company to grow
its capital.
Question 3:
1.a Allocating joint cost of the two products soda and chlorine with the help of sales
value at split off method:
Allocation for Joint costs using sales value of
Splitoff Method
Soda Chlorine/
Basalt
Total

FUNDAMENTALS OF INVESTING
8
Sales value of total production at splitoff cost 75,000.00 150,000.00 225,000.00
Weights 0.33 0.67
Joint cost allocated 666,666.67 1,333,333.33 2,000,000.0
0
1.b Allocating joint cost of the two products soda and chlorine with the help of physical
measure method:
Allocation of Joint costs using physical-
measure method
Soda Chlorine/
Basalt
Total
Physical measure of total production 1,500 1,000 2,500
Weights 0.6 0.4
Joint cost allocated 1,200,000 800,000 2,000,000
2. Allocating joint cost of the two products soda and chlorine with the help of net
realizable method:
Allocation of cost using net realizable value
method
Soda Basalt Total
Final sales value of total production during
accounting period
75,000.00 250,000,000.0
0
250,075,000.0
0
Deducting separable cost - 90,000.00 90,000.00
Net realisable value at splitoff point 75,000.00 249,910,000.0
0
249,985,000.0
0
Weights 0.00 1.00

FUNDAMENTALS OF INVESTING
9
Joint cost allocated 600.04 1,999,399.96 2,000,000.00
3. Depicting the gross margin for each product under each of the three methods:
Gross profit margin of soda Sales value at split off Physical measure NRV
Revenue 75,000.00 75,000.00 75,000.00
Cost of goods sold 666,666.67 1,200,000.00 600.04
Gross margin (591,666.67) (1,125,000.00) 74,399.96
Gross margin percentage -788.9% -1500.0% 99.2%
Gross profit margin of Basalt Sales value at split off Physical measure NRV
Revenue 250,000,000.00 250,000,000.00 250,000,000.00
Joint cost 1,333,333.33 800,000.00 1,999,399.96
Separable cost 90,000.00 90,000.00 90,000.00
Gross margin 248,576,666.67 249,110,000.00 247,910,600.04
Gross margin percentage 99.431% 99.644% 99.164%
From the overall valuation of above measure adequate gross profit margin of both the
product can be identified. In addition, gross profit margin is used in detecting the return,
which could be generated from the overall product. In addition, the different type of methods
is used in detecting the actual cost of the product and the return, which it could help in
identifying profits from its operations. Khan, Garg & Jain (2015) mentioned that net
realizable value method allows the company to detect the actual cost incurred from the
operations.