Investment Appraisal and Return on Investment

This report discusses the usefulness of capital investment measures like ARR, Payback method, NPV and IRR. It provides recommendations for better investment options. The report also explains the reason for the finance director's confidence in IRR being in excess of 7%. Subject: Investment Appraisal and Return on Investment

Investment appraisal and
return on investment

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Critical discussion of usefulness of respective capital investment measures and making
recommendation for better option...............................................................................................3
Reason for confidence of finance director that IRR will be in excess of 7 %............................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Capital investment appraisal methods are one of the important concept that is related with
the taking of decision in relation with the investment (Siziba and Hall, 2021). The concept of
investment appraisal helps the management in taking up of business decision that in which
project the investment need to be made. It will also assist in financing of most appropriate option
so that the goal of the firm will be achieved. This report will discuss the usefulness of respective
capital investment measure followed with recommendations.
MAIN BODY
Critical discussion of usefulness of respective capital investment measures and making
recommendation for better option
With the analysis of the information provided it is clear that the use of different capital
investment appraisal techniques. This is particularly because when there are two or more
investment option then these techniques assist the company in analysing which option is better.
With the help of ARR that is accounting rate of return the company can evaluate the expected
return of the investment in comparison to the initial investment (Baum, Crosby and Devaney,
2021). The usefulness of ARR is that it assists RT plc in evaluating the profitability of
investment option quickly. In the present case the ARR of A20 was 13 % whereas B25 was 15
%. Hence, this simply implies that project 2 is better and profitable.
Further the payback period is a type of method relating to capital appraisal which outlines
the time within which the company will be recovering the cost of the investment. For company,
analysing the payback period is very useful as they can identify the time duration after which
company will start earning profit. In the present case of RT plc payback period for A20 is 3.67
years and for B25 it is 4.17 years. Thus, with this analysis it was evaluated that project A20 is
better. This is because with the after the period of 3.67 years an investment with the project A20
will start giving return and thus more beneficial in comparison with the project A25.
Moreover, another tool of capital budgeting is net present value which assist in
discounting the cash flow to the present value for the future earnings. The net present value of
A20 is 105700 and for B25 is 112400. With the analysis it is clear that the use of NPV is very

helpful for RT plc because it involves the time value of money at appraising the project. Hence,
on the basis of this calculation it is clear that B25 is better for RT plc with purpose of investment.
Along with this another method of capital appraisal is internal rate of return that is IRR.
This is another tool which assist RT plc in evaluating the investment option that is which
investment option has more potential benefits. With the help of IRR an estimation towards the
profitability with respect to the potential investment can be analysed (Marchioni and Magni,
2018). In the present case A20 is having 10.9 % and B25 9.5% and with this it can be stated that
A20 is more beneficial for investment. Overall it can be stated that use of capital investment
techniques is helpful in evaluating the different investment option thoroughly and decide which
option is much profitable (Poggensee and Poggensee, 2021).
With the help of capital investment appraisal technique RT plc can identify the option
which will yield more profits for company and in less time. Along with this, the different capital
investment methods are easy to use and provides a wide range of basis for the selection of most
appropriate and revenue generating investment options (Capital Budgeting: Techniques &
Importance, 2022). Moreover, the use of different capital investment techniques focuses on long
term return and growth which is beneficial for company. There are different techniques which
can be used by RT plc for evaluating the project and finding the best revenue yielding project for
company and its growth. Thus, it can be right to said that with the adoption of most suitable
method the decision in relation with investment can be made.
As per the above analysis it can be recommended to RT Plc that it must make an
investment in A20 because with the investment of low initial capital i.e. 100000 the RT Plc can
make high rate of return. Since, it’s payback period is low i.e. 3.67 which shows that after the
completion of 3.67 years the company can start earning profit. Likewise, with the persistence of
high i.e. 10.9% IRR the RT Plc can raise the profitability in respect to the potential investment.
Thus, with the persistence of earning of high profitability in short period of time and low capital
investment the RT Plc is recommended to make an investment in Project A20. With this
investment the company can earn high proportion of return over its investment.
Reason for confidence of finance director that IRR will be in excess of 7 %
The reason that the finance director is confident in relation with the IRR to be more than 7%
is related with the cost of capital. As the cost of capital is 7% which clearly shows that the

projected project will carry higher return in comparison with the covering of cost of capital.
Since, it is a fact that the investment in any project will be made only when the rate of capital
will be recovered and profit will be earned. Likewise, in the present case as the cost of capital is
7% which clearly shows that making an investment in any project will bring the return i.e. IRR
to be more than 7%. Likewise, as there are only two project options so obtaining of IRR to be
more than 7% in both the project is quite common because initially covering of cost of capital
will be made by every project and after that earning of return will be made which will definitely
be more than 7%.
CONCLUSION
From the above report it can be concluded that with the help of capital investment appraisal
technique the decision related with the investment of money will be taken. The use of
appropriate technique i.e. ARR, Payback method, NPV and IRR will assist the management in
taking up of right decision related with the investment. In the same way it is also summarize that
with the choosing of most appropriate option the business will be assisted towards the earning of
profit and growth perspective.

REFERENCES
Books and Journals
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Marchioni, A. and Magni, C.A., 2018. Investment decisions and sensitivity analysis: NPV-
consistency of rates of return. European Journal of Operational Research. 268(1). pp.361-
372.
Poggensee, K. and Poggensee, J., 2021. Investment Valuation and Appraisal. Springer
Fachmedien Wiesbaden.
Siziba, S. and Hall, J.H., 2021. The evolution of the application of capital budgeting techniques
in enterprises. Global Finance Journal. 47. p.100504.
Online
Capital Budgeting: Techniques & Importance. 2022. Online. Available through:
< https://www.edupristine.com/blog/capital-budgeting-techniques>.