Investment Appraisal Technique PDF

Comprehensive Report of Goodfellow PLC

TABLE OF CONTENTS
TABLE OF CONTENTS.....................................................................................................................2
INTRODUCTION................................................................................................................................3
Presenting how investment appraisal techniques aid in decision making of the firm.................3
a). Payback period of the proposed investment...........................................................................3
b).The Accounting Rate of Return of the proposed investment:.................................................5
c).The Net Present Value of the proposed investment:...............................................................6
d).The Internal Rate of Return of the proposed investment:.......................................................8
e. Commenting on the viability of proposed project...................................................................9
Commenting on the viability of proposed project.......................................................................9
CONCLUSION..................................................................................................................................10
REFERENCES...................................................................................................................................11
APPENDIX........................................................................................................................................13
1. Computation of cash inflow...................................................................................................13
2. Payback period.......................................................................................................................14
3. Calculation of Average rate of return....................................................................................14
4. Computation of Net present value (NPV)..............................................................................14
5. Calculation of IRR.................................................................................................................15

INTRODUCTION
Capital budgeting is the process of identifying, analysing, and selecting the investment
project which should give the best return to the firm. An investment proposal should be judged
in order to find the required return on the investment by the company. There different methods
of capital budgeting techniques which are being adopted by the company to find the viability of
the proposed project to the company. The present report is based on a scenario of the Goodflow
plc which are investing in making 200 houses. The report will help the Board of directors in
knowing the potential return on the investment on the proposed project. The report will discuss
the different techniques of capital budgeting that will help the management in their planning
process of the firm's long-run and sort-run goals. Further, report will help in understanding
different capital budgeting techniques. Different calculation of the capital budgeting techniques
will be presented in the report which will help in evaluating the viability of the presented
projeect.
Presenting how investment appraisal techniques aid in decision making of the firm
On the basis of cited case situation, Goodfellow Plc, is planning to invest funds in the
development site with the motive to generate high margin. Hence, company is focusing on
building two types of house such as small and large. In this regard, by employing investment
appraisal tools manager of Goodfellow Plc would become able to assess the viability of
proposed project. For evaluating the viability of proposed project several tools have been applied
such as payback, net present value, average and internal rate of return.
Benefits and drawbacks of investment appraisal tools:
a). Payback period of the proposed investment
Payback period is the expected time that are required to earn back the amount that are
being invested in a project. It is an effective method to identifies the risk associated with the
proposed project. The investment with the shorter payback is considered as the better investment
plan, whereas the investment with higher payback is considered little risky (Payback Period ,
2018). The payback period is help in determining the investment opportunities and the product
development projects on the basis of the time taken to recover the investment amount. The

payback period after being compared to the required time will determine the acceptability of the
proposed investment. It is considered as one of the easiest method of the investment appraisal
techniques.
Formula of the payback period:
Payback period: Initial Investment / Cash-flow per period.
As per the formula, the investment proposal with the less period is considered as acceptable.
In the context of the organisation, the payback decision rules states that acceptable
projects must have the less time period in recovering the amount investment. The management
of the company will emphasize on the liquidity and the need to minimise the rule through a
rapids recovery of the initial investment (Payback Period & Discounted Payback Period |
Formula | Example, 2018). The payback period is commonly used for appraisal investment
techniques. It also used as a measure of attractiveness in a company. Payback period is suitable
for the company with limited cash flow. The method is preferred by the companies which are
suffering from the liquidity crises and want to get back the investment inn the shorter possible
period.
Payback period: It implies for the length of time which firm will take for recovering its
initial outlay. This in turn helps in assessing time period after which firm will get profit margin.
Advantages
 Easily understandable and simple to calculate
 Helps in assessing risk associated with the proposal
 It gives high level of importance to liquidity aspect and helps in making decisions
pertaining to investment proposals (Payback period, 2018)
 it helps the management of company to quickly estimate the time needed for the
company to get return of the amount invested.
 It assist the manager in identifying and minimizes the risk that are being associated with
the initial investment.
Disadvantages