Investment Appraisal Techniques and Valuation Methods for Takeovers and Mergers

MANAGEMENT

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK...............................................................................................................................................3
1. Investment Appraisal Technique ............................................................................................3
(a). Calculate Various methods of investment appraisal techniques. Also state the economic
feasibility of the project..............................................................................................................3
(b). Comment on the directors decision and evalute effects of proposal on the company..........6
(c). Explain the advantages and disadvantages of investment appraisal techniques- ................6
3. Takeovers and mergers ..........................................................................................................8
(a). Compute various valuation methods....................................................................................8
(b) Critically converse above the challenges that bare associated with the valuation techniques
used above. Also recommend that what are the techniques that could be recommended to the
board member of Kings Plc. .....................................................................................................11
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial management is known for planning, controlling, organizing the financial
activities so that there is regular and adequate flow of funds to carry out smooth business
operations. Financial management is done by three segments, they are investment decisions,
financial decisions and dividend decisions (Yusoff, 2019). Capital Budgeting is the financial tool
to evaluate the investments and expenses so that the best returns on investment can be attained.
This technique is used by the business management in order to plan the investments on fixed
assets, with the help of this it can be determined whether the projects shall be accepted or not.
The following report consists of the techniques of capital budgeting and their calculations and
the impact of proposal on the business firm. With this, it also comprises the advantages and
disadvantages of investment appraisal techniques. Moreover, it also provides with the ratio
evaluation and the difficulties linked with the valuation methods.
TASK
1. Investment Appraisal Technique
(a). Calculate Various methods of investment appraisal techniques. Also state the economic
feasibility of the project.
Payback Period: This method ascertains time period in which an organisation recover its
initial outlay. It is the time taken to reach break even point. It does not lay any attention on the
overall inflows received during the life cycle of the project (Wicaksono, Laurens and Novianti,
2018).
Year Annual Cash
Inflow
Annual Cash
Outflow
Annual Net Cash
flows
Cumulative
Cash
Inflows
0 -588.5 -588.5 0
1 233.7 33.2 200.5 200.5
2 233.7 33.2 200.5 401
3 233.7 33.2 200.5 601.5
4 233.7 33.2 200.5 802
5 233.7 33.2 200.5 1002.5
6 233.7 33.2 200.5 1203
7 233.7 33.2 200.5 1403.5

7 SV 76.505 - 76.505 1480.005
Total 1635.9 -356.1 891.505 1480.005
Payback Period = Number of complete years + (Cash outflow – total inflow till date) /
Cumulative cash inflow
= 2 + (588.5-401) /601.5
= 2 + 0.312
= 2.312 Years
Average Rate of Return:- This method ascertains the average amount of cash flow generated
during a year. This rate is calculated by average annual cash inflows divided by total number
of year the project lasts.
ARR = Annual Average Profits / Cost of Investments * 100
= (127.36 / 588.5) * 100
= 21.64%
Where, Annual Average Profits = 1480.005/7
= 121.36
Net Present value:- This methods helps in determining the amount of cash a company will
receive at the end of the project in terms of present value. Present value is the value of future
cash inflows in terms of present value of those future cash inflows (Al Nuaimi and
Nobanee, 2019).
Years
Net
Cash
Inflows
Discounting @ 9% PV of Cash Inflows
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
PV of Cash Inflow (A) 1175.9784
PV of Cash Outflow (B) 588.5
Net Present Value (A-B) 587.4784