Comparison of Discounted and Non-Discounted Investment Appraisal Methods

This project report compares and contrasts the key differences between discounted and non-discounted methods of investment appraisal. It highlights that discounted techniques use future cash flows to determine their present-day values using Weighted Average Cost of Capital (WACC), whereas non-discounted methods calculate cash flows on their current values. The report also emphasizes the importance of finance in business operations, including cost-volume analysis and budget formulation.

INTRODUCTION TO
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
a. Various corporate governance codes which may prevent corporate scandals and collapses...1
b. Advantages for an organisation of registering as a sole trader................................................1
QUESTION 2...................................................................................................................................2
a. Preparing Production Budget for the period:...........................................................................2
b. Calculation of Target Selling Price:.........................................................................................3
c. Preparing a statement of Cash Budget of Z Ltd. of four months:............................................3
d. Disadvantages of using Zero-based Budgeting System:..........................................................4
QUESTION 3...................................................................................................................................4
a. Calculation of total fixed costs per month...............................................................................5
b. Calculation of variable cost per month....................................................................................5
c. Calculation of contribution per month.....................................................................................5
d. Break even number of consultations required per month........................................................5
e. Strengths and weaknesses of cost volume profit analysis........................................................6
QUESTION 4...................................................................................................................................7
a. Various Funding Options in terms of Debt and Equity available to the entrepreneur.............7
b. Key Differences between discounted and non-discounted methods of investment appraisal. 8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance can be defined as the monetary resources that are required by all the business
entities in order to execute business operations. For all the organisations it is very important to
manage funds appropriately so that business goals such as profit and sales maximisation could be
achieved (Brealey and et.al., 2012). If managers in companies are not able to manage it properly
then it creates problems such as lack of financial resources which interrupt execution of business
activities. This report is based upon analysis of different topics such as various corporate codes
which can help to prevent corporate scandals, advantages for an organisation of registering as s
sole trader etc. Along with this, formulation of different budgets, calculation of various costs and
different investment appraisal methods are also covered under this report.
QUESTION 1
a. Various corporate governance codes which may prevent corporate scandals and collapses
Corporate governance: It can be defined as the collection of different types of rules,
regulation and principles that are imposed by legal authority of a country for all the business
entities that are executing business in a country. For all the companies it is very important to
comply with them in order to ignore corporate scandals and collapses. Some of its codes are as
follows:
Organisation for economic cooperation and development principles: It states that all
the business entities or corporations are required to follow specific guidelines that are made for
financial reporting and auditing. It helps to prevent corporate scandals because it can help to
keep track record of operations which will be beneficial for managers to form strategic decisions
to reduce possibility to corporate scandals (Frino, Hill and Chen, 2015). It adds different features
to the final accounts such as transparency, full disclosure etc.
Stock exchange listing standards: According to this code of corporate governance it is
very important for a company who is offering shares to public to list itself on a registered stock
exchange. With the help of it corporate collapses could be reduced because it will help to
decrease the possibility of governmental interference in business operations.
b. Advantages for an organisation of registering as a sole trader
If an organisation register itself as a sole trader, then there are various benefits for it to
that enterprise. All the advantages of it are as follows:
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 If a company is registered as a sole trader, then the owner will be the only boss and
power of decision making is not required to be shared with other partners of people
within the organisation.
 In sole trader, owner keeps all the profits so if an organisation is registered as a sole
trader then all the profits could be kept by single person who is the owner of business.
 A sole trader business could be established easily due to lack of limitations of recording,
reporting and legal structures (Gitman, Juchau and Flanagan, 2015). And the
organisations structure is also not required to be followed in this type of business as a
single person executes all the business activities.
 If an organisation gets registered as a sole trader, then there is one main benefit of it to
the company is that there is no legal implication regarding sharing information with
public regarding business activities.
 The business structure of a sole trader could be changed easily because if the owner plans
to expand business in future then it could be done easily.
QUESTION 2
Budgetary Information from Z Ltd. (Given):
Particulars £
Production Output 40000 units 5
Labour Hours (Skilled) 2 (hrs per unit) 18
Labour Hours (Unskilled) 1.5 (hrs per unit) 9
Expenses 35% of total labour cost
Fixed Costs for period 10000
a. Preparing Production Budget for the period:
Particulars Units £ per unit £
Total Cost 40000 5 2000001
Add: (Skilled) Labour Cost @ 2
hours per unit 40000 18 1440000
Add: (Unskilled) Labour Cost @
1.5 hours per unit 40000 9 540000
32 2180000
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Add: Expenses 40000 9.45 693000
Add: Fixed Costs 40000 0.25 10000
Budgeted Production Cost 40000 72.075 2883000
1-Since there is no information provided regarding the units of opening stock or closing stock, it
has been assumed that the £5 per unit is related to materials utilized in production of such
output.
A production budget is one which is a comprehensive statement which details out a
complete break-down of given information in the form of units of products manufactured by a
particular organisation (Melicher and Norton, 2013). Utilizing this information, it has been
ascertained that the total per unit production cost for the budgeted output is £72.075 which in
monetary terms amounts to £2883000. Thus, one can say that the total unit cost incurred by Z
Ltd. in the production of 40,000 units for the next period is £72.075 per unit.
b. Calculation of Target Selling Price:
Particulars Units £ per unit £
Total Cost 40000 7.25 290000
Add: (Skilled) Labour Cost 40000 26.1 2088000
Add: (Unskilled) Labour Cost 40000 13.05 783000
46.4 3161000
Add: Expenses 40000 25.12 1004850
Add: Fixed Costs 40000 0.3625 14500
Target Selling price 40000 104.51 3723600
Utilizing the two tables prepared earlier in this section, the aforementioned table has been
formulated. This table includes the ascertainment of Target Selling Price that must be taken into
account by marking up the unit costs by 45%. Hence, the expenses worth £3723600 is
ascertained as 35% of the total labour cost, that is, £2871000 (=£2088000+£783000). On the
other hand, the Fixed Costs worth £0.3625 per unit is ascertained by marking up the unit fixed
costs by 45%. Through this process, the targeted selling price per unit for the 40,000 units of
output produced is £104.51.
c. Preparing a statement of Cash Budget of Z Ltd. of four months:
Given Information:
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Second Month 60% of the unit price
Third Month 30% of the unit price
Fourth Month 10% in the fourth month
Finished Units Purchased 40000
Particulars January February March April
£ £ £ £
Purchase of Finished Units from
Supplier 2883000 2883000 2883000 2883000
Payment to Supplier for:
January - 1729800 864900 288300
February - - 1729800 864900
March - - - 1729800
April - - - -
Total Budgeted Cash 2883000 4612800 5477700 5766000
As per the information given in previous table, the above Cash Budget has been prepared.
In order to ensure simplicity of calculations, it is assumed that the month initiates on the first of
January. Another assumption that has been taken while preparing this budget is that the Finished
Units purchased by Z Ltd. from its suppliers are 40,000 at £72.075 per unit on a monthly basis.
Keeping this in mind, the payments made for the purchases have been shown for each purchase
between the periods January and April. For instance, the 60% of the unit price paid to the
supplier for January Purchase is allocated to February. On the other hand, the purchase of
finished units made in February and other consecutive months have their 60% share payment
allocated to March and other consecutive months.
d. Disadvantages of using Zero-based Budgeting System:
In the context of given case scenario, Z Ltd. has been utilizing various budgetary
information in order to control costs of production while maximising profit. Keeping this mind,
various drawbacks of using Zero-based Budgeting System have been advised to its management
which have been discussed as under:
 Time Consuming as it includes initiating of planning of all functional costs from scratch
at the beginning of each financial period (Ross, Westerfield and Jaffe, 2013).
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 Since it includes complete refurbishing of functional costs, higher number of manpower
is required to formulate the ideal Zero-based Budget for the company.
Thus, adoption of this system would result in incurring of excessive costs for Z Ltd. as
well as expertise to explain the inclusion or exclusion of cost related to each task.
QUESTION 3
Given information:
Particulars Costs
Cost of 1
month
Annual rent 15000 Yearly 1250
Marketing cost 3000 Quarterly 1000
IT 2 Per consultation 250
Energy drink
1.25 per
consultation 156.25
Labour 10 per consultation 1250
Consultation charges 18 per consultation 2250
a. Calculation of total fixed costs per month
Particulars Amount
Rent (15000 / 12) 1250
Marketing expenses (3000 / 3) 1000
Total fixed expenses 2250
b. Calculation of variable cost per month
Particulars Amount
IT cost (125 * 2) 250
Energy drink (125 * 1.25) 156.25
Labour cost (125 * 10) 1250
Total variable expenses 1656.25
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c. Calculation of contribution per month
Particulars Amount
Charges per consultation (125 * 18) 2250
Less: Variable expenses
IT cost (125 * 2) 250
Energy drink (125 * 1.25) 156.25
Labour cost (125 * 10) 1250
Contribution per month 593.75
d. Break even number of consultations required per month
Break even point in number = Fixed cost/ contribution per unit or consultation
= 2250 / (593.75/125)
= 2250 / 4.75
= 473.68 or 474
e. Strengths and weaknesses of cost volume profit analysis
Cost volume profit analysis: It can be defined as a technique which is used by business
entities to determine their contribution which is remaining after deducting all variable expenses
from sales or revenues. The contribution is firstly used to recover all the fixed costs and then the
remaining amount is considered as profits for the organisation (Schwienbacher and Larralde,
2012). Main objective of using it is to determine relationship between profit, volume and cost of
specific business units. With the help of it ability of an organisation to generate profits could be
measured. In other words, it could be defined as a planning process which is used by managers
for the purpose of forecasting future volume of production, sales, costs and profits which could
be acquired in future. There are various strengths and weaknesses of this technique which are as
follows:
Strengths:
 Cost volume profit analysis help top level executives to formulate strategic decisions for
future by helping them to determine value of actual expenses and incomes which has
taken places for a specific time period. With the help of it they will be able to make
strategies in which they can plan to enhance overall profitability of organisation.
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 With the help of cost volume profit analysis detailed information of organisation's
activities could be gathered. It can guide managers to forecast future sales, profits and
losses which may take place in upcoming period of time (Cost-volume-profit analysis,
2019).
 It is considered as the base of plans that are made for various purposes such as marketing,
budgeting etc.
 As it guides managers to forecast future sales and revenues so it can also help them to
make budget according to requirements of organisation.
Weaknesses:
 Cost volume analysis can result in different human errors because for managers it is not
possible to record information in a precise way and if detailed data is recorded in books
then it can result in human errors (Shoup, 2017).
 As it is based upon projection and future is uncertain so it is not possible to trust the
projections to make appropriate business decisions.
 It taken number of units in to consideration to project costs and revenues for future period
but it could not be the only driver to forecast the same.
QUESTION 4
a. Various Funding Options in terms of Debt and Equity available to the entrepreneur
Funding Options related to debt and equity help in reducing costs and providing
flexibility to the available working capital with the entrepreneur. In the context of given case
scenario, the solicitor invests £1,000 from her savings. She aims to accumulate the rest of the
capital from external funding options which have been discussed as under:
Type of Funding Option Advantages Disadvantages
Angel Investing They are a funding option in
terms of equity. They prove to
be less risky than debt
financing as this investment is
not required to be paid back in
event of bankruptcy (Van Der
Wijst, 2013).
Loss of complete control of the
start-up itself.
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Bank Loans They are a funding option in
terms of debt and are available
as a fixed source of funding
for a fixed term including
interest payments.
This option requires collateral
security which can result in
forfeiting of the asset in the
event of bankruptcy.
Personal Sources of Income An Equity funding option that
provides cheap source of
Finance as the entrepreneur is
already having a fixed source
of income through her other
business venture. Thus,
resulting in time-saving too.
May result in decline of
retained funds for that business
which has been undertaken by
the solicitor.
b. Key Differences between discounted and non-discounted methods of investment appraisal
For any organisation, investment appraisal methods play an important role as they help in
measuring the feasibility and viability of a project that is considered as a potential opportunity
for the enterprise. Due to this reason, a company may apply various discounted and non-
discounted methods of investment appraisal. Discounted techniques of investment appraisal are
those which ascertain Future Cash flows by discounting them using a certain figure, usually
Weighted Average Cost of Capital (WACC) to determine their present day values. These include
calculation of NPV, IRR of the projects (Yescombe, 2013). On the other hand, the Non-
Discounted methods of investment appraisal are ones which derive cash flows on their current
values. Mostly these include determination of Payback period as well as Accounting Rate of
Return.
Thus, the key difference between the two is the utilization of discounting factor to derive
present value of the given future cash flow figures.
CONCLUSION
From the above project report it has been concluded that finance is an element which is
required by all the business entities to conduct operational as well as executional activities. With
the help of it long as well as short term goals could be achieved by utilising monetary resources
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appropriately. If an organisation is not able to manage funds properly then it can leave negative
impacts on operational efficiency. There are various techniques which could be used to
determine actual status of the company these are cost volume analysis, investment appraisal
techniques etc. Companies can also formulate budgets such as production so that actual cost of
business activities could be analysed.
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