Evaluation of Investment Options and Sources of Funds for AYR Co.

Financial Accounting Assignment

Prepared By
Student Name:
Date: 25th November 2018
Executive Summary
This report is intended to provide fruitful information to the
Board of Directors of the AYR Co. in relation to the two
investment opportunities currently available with it, naming
Project Aspire and Project Wolf for which the various Capital
budgeting techniques have been resorted to so that to justify the
decision of selection of a project with the concrete evidence.
Further it also recommends the selection of a project and
suggests the other factors to be kept in mind while making
selection of any investment projector opportunities. It also tries
to make the appropriate choice of sources of funds along with the
Page 1
A Brief
Analysi
s of the
evaluati
on of
Investm
ent
options
along
with the
Sources
of
Funds

respective cost of capital and its overall impact on the weighted average cost of capital of the
AYR Co.
Table of Content
s
Executive Summary................................................................................................... 2
Introduction................................................................................................................ 4
Answer to Question No.1............................................................................................ 5
Question No. 2............................................................................................................ 9
Question no.3........................................................................................................... 12
Page 2

Conclusion................................................................................................................ 18
References............................................................................................................... 20
Appendix -1.............................................................................................................. 22
Introduction
AYR Co. is currently in the process of considering the proposed investment to be made in one of
its two projects naming Aspire and wolf respectively for which the board is seeking the
appropriate information along with the strong supportive evidence to justify the selection of any
one of these two projects based on the three Capital budgeting Techniques naming Net Present
Page 3

value, Internal rate of Return and Payback period respectively due to the Budget constraint .
Both projects have its own unique feature like Project Aspire is seen to expand the current
product range and place an appeal to both the current and potential customers, whereas project
wolf shall provide a new direction by appealing to a new group of customers (Charles H, et al.,
2015). Board is also expecting to have a detailed analysis on the recommended selection of any
one of these projects along with the other factors to be kept in mind while making such selection
in addition to the result obtained from the use of capital budgeting techniques. Finally, Board is
seeking advice on the sources of fundi’s. Debt or equity to be chosen for the funding of the
selected project along with the overall impact of such selection on the weighted average cost of
AYR co (Cundill, et al., 2017).
Answer to Question No.1
[See Appendix 1, Peg No.]
Page 4

Before going into the detailed calculation, it is better to have a brief idea on the three of the
Capital Budgeting Techniques, naming Net Present Value, Internal rate of Return and Payback
Period, which have been discussed below:
Net Present Value
It is the method of capital budgeting in which at first the future cash inflows to be generated in
the project are estimated, thereafter this future values of cash inflows are discounted at a rate to
arrive at the present value of future Cash inflows from which the present value of cash outflow,
that is the value of investment proposed to be made in present is subtracted to get the Net present
Value of the project (Kaufmann, 2017). If the value derived is positive, then it is recommended
to select the project otherwise not.
Internal rate of Return
It is the rate of return at which the net present value of the project is zero or in other words it is
the rate at which present value of cash inflow is equal to the present value of cash inflows. The
reason behind calling it the internal rate of return is because it doesn’t consider the external
factors like inflation etc. while determining the rate of return (Bennouna, et al., 2010).
Payback period
Under this method without taking into the time value of money in to the consideration, it tries to
calculate the period which is required to recover the initial capital investment proposed to be
Page 5