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