Investment Appraisal Techniques for Aspiradora Limited

REPORT

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
(A) Estimation of Annual Incremental Cash Flows for The Manufacture of Supanova Vacuum
Cleaner....................................................................................................................................3
(B) Comparative Evaluation of the Two Projects Using Appropriate Appraisal Techniques:5
C) Problems arising using investment appraisal techniques when the projects are mutually
exclusive and discussion on assertion that expansion will generate value to shareholders:. .8
(D) Recommendation to Aspiradora regarding the course of action they have to implement:9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Investment appraisal techniques are financial instruments used in the organisation in order to
evaluate the feasibility of the desired project or not. There are numerous investment proposal
techniques such as Net present value method, profitability index, internal rate of return method,
average rate of return and so on (Spencer and et.al., 2019, July). The best method to evaluate the
desirability of the project is NPV method as it considers time value of money and is suitable
when we have to select one proposal amongst the two. In this report there are two alternative
options evaluating by the Aspiradora limited that is whether to introduce a new luxury product in
order to increase the sales in high end market that is bag less and cordless vacuum cleaner called
as Supanova or to go for expansion using the existing product that is Dark star by spending
certain amount of capital investment in market development as suggested by the marketing
managers of Aspiradora. At the end of this report certain recommendation is also provided to the
organisation with respect to selection and reason for the same. It is also recommended that
existing product that is Dark Star must be continue and lower amount of investment to be made
in new product so that its benefits cab be analysed.
TASK
(A) Estimation of Annual Incremental Cash Flows for The Manufacture of Supanova Vacuum
Cleaner.
The following statement has been prepared on the basis on information available. In
preparation of the statement the following assumption has been taken place:
 The Selling price of Supanova has been constant throughout the period of 5 years
 Capital allowance received from the government has been considered as inflow since it is
a rebate on actuation of plant and machinery and must be settled against it.
 The working capital invested over the period of 5 years has been fully recovered at the
end of 5th year fully and all the accounts receivable and payable are settled accordingly.
 There is negative cash balance in the form of inflow in year 1 because cost of plant and
machinery has been considered as cash outflow at the beginning.
 Tax payable on capital gain will be settled at the end of fifth year assuming that it is paid
at the end of project life.

 In calculating the incremental cash flows discounting has not been carried out as question
asked about annual cash flows from the product.
 The overheads are not distributed assuring they are not relevant for decision making as
they already incurred in the existing product.
 The remaining 50% of the amount invested in market research is still unpaid over the
project life.
Statement Showing Annual Incremental Cash Flow for Manufacture of Supanova
Particular 1 2 3 4 5
Cash Inflow:-
Expected Units Sold 100,000 104,000 108,160 112,486 106,862
Selling Price per unit 300 300 300 300 300
Revenue 30,000,000 31,200,000 32,448,000 33,745,920 32,058,624
Sale of Old Machine - 225,000 - - -
Capital Allowance on Machine 1,800,000 1,476,000 1,210,320 992,462 813,819
Recovery of Working Capital - - - - 25,512,407
Salvage value of Machine - - - - 1,500,000
Total Cash Inflow (A) 31,800,000 32,901,000 33,658,320 34,738,382 59,884,850
Cash Outflow:-
Plant and Machine 10,000,000 - - - -
Market Research 45,000 - - - -
Material Cost 10,800,000 11,232,000 11,681,280 12,148,531 11,541,105
Labour Cost 6,000,000 6,240,000 6,489,600 6,749,184 6,411,725
Depreciation on Plant 1,700,000 1,700,000 1,700,000 1,700,000 1,700,000
Tax Payable on Capital Gain - - - - 28,500
( 225000 - 75000 ) * 19%
Rent Paid ( 25% of 160000) 40,000 40,000 40,000 40,000 40,000
Working Capital Requirement 4,800,000 4,992,000 5,191,680 5,399,347 5,129,380