Investment Appraisal and Return on Investment

This report explains the benefits of capital investment appraisal techniques and how they help in predicting which project must be selected in a business. It covers various tools like accounting rate of return, internal rate of return, payback period and net present value. The report provides recommendations for project selection based on these techniques. It also explains the reason why finance director is confident that IRR would be excess of 7% in both projects.

Investment Appraisal
And Return On
Investment

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK...............................................................................................................................................4
Q1. Explain the benefits of capital investment appraisal technique and advise which option
must be chosen............................................................................................................................4
2. State the reason why finance director is so confident that IRR would be excess of 7% in
both projects................................................................................................................................5
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The report prepared highlights various capital investment appraisal techniques and how
they are helpful in predicting which project must be selected in a business. This technique takes
in account Accounting rate of return, internal rate of return, payback period and net present value
as well which helps to understand which project would prove to be helpful for increasing
profitability. It also helps to understand time taken for covering the investment made in projects
and which project must be chosen keeping future conditions in mind. This report helps to give
finance director an idea as which project would be suitable for business, how it will generate
required profits and revenues. This report also helps to understand what is the interest earned and
where business is lagging behind and provide recommendations for the same ( Cheng and Tan,
2019).

TASK
Q1. Explain the benefits of capital investment appraisal technique and advise which option must
be chosen.
Capital investment appraisal focuses on management decisions which are related to
assess which project must be chosen and which would prove to be more profitable than others
available in the market. It also helps to give an overview about how financing can be done and
what could be possible ways which would help in achieving objectives set by the company.
There are many capital budgeting tools which help to evaluate feasibility of capital invested.
Considered factors are Discounted payment period, Net present value, Payback period,
Profitability index, Internal rate of return etc. Investment appraisal explains finding possible
investments which can be processed by business and which project would generate more
revenues, profits. It helps to predict what could be possible long term trends and company's
profitable condition in the coming years (Harrison, 2018).
Types of Capital investment appraisal techniques:
1. Accounting rate of return: It defines the revenue earned by the company for a certain time
period.
2. Payback period: It explains the time needed for recovery of the initial investment made in
a project by business.
3. Internal rate of return: It is explained as a tool which helps to predict profitability of
investments made in a project.
4. Net present value: It states the difference between present value recorded of cash inflows
and present amount of cash outflows for a certain period (Nesticò and Maselli, 2020).
Recommendation for the projects:
1. 1. Accounting rate of return: The ARR is a ratio which is applied in capital budgeting to
assess an investment which will give maximum return in comparison to initial cost. ARR
whereas is not accountable for the time value of money and if ARR does not result to be
equal or more than expected rate of return then project is expected to increase profit
margin of the business. Project B 25 must be selected the reason being it is providing
15% which is more in comparison with Project A 20 which provides only 13%. Thus it

can be concluded that Project B25 will prove to be more profitable (Habteyes and Ward,
2020).
2. 2. Payback period: It is defined as time taken to recover the investment made in a
business in initial stages. It also covers cost incurred and make the business profitable for
long life cycle of business. In capital budgeting, there are two approaches. There are
some techniques which does not consider the time value of money and popularly called
as traditional method of capital budgeting. This technique assists in knowing the duration
or time in which it recovers the cost of investment. It is calculated by taking the amount
of initial investment and divide by average cash inflows. It is a reliable technique. in this
the project having higher pay back is not selected for the investment purpose whereas a
project having low pay back period is viable for the organisation. Project A20 takes 3.67
years to cover its investment made in initial stages and Project B25 takes 4.17 years for
paying back initial amount. So, Project A20 must be selected.
3. 3. Net present value: In Net present value method project is chosen only when present
value of cash flow is more than initial investment made in business. In present situation
Project A20 would be given more priority because only this project consists of positive
Net present value whereas other project is having negative NPV(Linciano and et.al.,
2018).
4. 4. Internal rate of return: Internal rate of return describes which project will be generating
more revenue and will provide high interest on investments made. According to this
method Project A20 would be selected because it is providing higher returns when
compared to Project B25.
From above observations it can be concluded that Project A20 must be selected as it has
proved to be more profitable than other projects. Project A20 is providing Positive NPV which
clearly states that it must be selected.
2. State the reason why finance director is so confident that IRR would be excess of 7% in both
projects.
It can be said that the reason behind finance director being so confident about IRR%
would be that the net present value of Project A20 is positive which highlights that only this
project would be given priority. Higher the IRR more chances can be observed for selection of
this project. However both projects possess IRR more than 7% as said by director. It also helps

in selection of project because NPV and ARR is higher than 10% in both cases. In every
situation IRR is higher than cost of capital. It can also be said that strategic position of Project
also affect IRR as it affects profit earned by the business.

CONCLUSION
From the above prepared report it can be concluded that there are many projects in which
a business invests its time and money but for finding which project would give higher returns
than others it is advised to use capital investment tools. It can further provide advices and
guidance as what could be done and how can it be done. What could be the possible techniques
which would help business to function smoothly in an environment. This report provides a deep
knowledge of payback period, accounting rate of return, internal rate of return etc.

REFERENCES
Books and Journals
Cheng, C., Hua, Y. and Tan, D., 2019. Spatial dynamics and determinants of sustainable finance:
Evidence from venture capital investment in China. Journal of Cleaner
Production. 232. pp.1148-1157.
Habteyes, B.G. and Ward, F.A., 2020. Economics of irrigation water conservation: Dynamic
optimization for consumption and investment. Journal of Environmental
Management. 258. p.110040.
Harrison, R., 2018. Crossing the chasm: The role of co-investment funds in strengthening the
regional business angel ecosystem. Small Enterprise Research. 25(1). pp.3-22.
Linciano and et.al., 2018. How financial information disclosure affects risk perception. Evidence
from Italian investors’ behaviour. The European Journal of Finance. 24(15). pp.1311-
1332.
Nesticò, A. and Maselli, G., 2020. A protocol for the estimate of the social rate of time
preference: the case studies of Italy and the USA. Journal of Economic Studies.