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Managing Financial Resources Assignment- Victoria Babies Ltd

   

Added on  2020-06-06

11 Pages2644 Words32 Views
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TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Appraisal techniques..............................................................................................................1Application.............................................................................................................................4Findings..................................................................................................................................7CONCLUSION................................................................................................................................8REFERENCES................................................................................................................................9

INTRODUCTIONInvestment appraisal techniques are quite useful for assessing effectiveness andattractiveness of new project of company in effectual way. The present report deals with VictoriaBabies Ltd which is planning for expansion. It has various investment options which is requiredto be evaluated and best one is to be chosen. Four techniques are discussed such as paybackperiod, NPV, ARR, IRR listing out shortcomings and advantages of each of them. Moreover,calculations of various appraisal techniques are also made to chose the best option amongvarious options available to company. The computations of all the appraisal techniques are madeand findings are imparted for selecting the best option to investment in by the company to yieldadequate returns. Appraisal techniquesInvestment appraisal techniques play vital role in the company to make better decisionsrelated to investment. Victoria Babies Ltd is planning for expansion in varied aspects. It isessential for taking decision with the help of appraisal techniques. These include IRR (InternalRate of Return), NPV (Net Present Value), Payback period and ARR (Accounting Rate ofReturn). These all techniques are discussed below-Payback period It shows recovery period of invested project. It is quite essential technique whichprovides clarity about risk associated with project. This paves the way for company to opt in forinvestment or not. Generally, shorter payback period is considered to be the best. This is becauseinvestors get the returns within short span of time (Li and Trutnevyte, 2017). Advantages1. The main advantage of payback period is that it evaluates risk associated with the project.2. Moreover, it provides clarity about when investment will yield desired returns.3. Another advantage of this method is that it is simple to calculate and provide better results byutilising time factor.4. It is focused on risk factor of the project so that adequate returns can be generated with muchease.Disadvantages 1. There are shortcomings as well of this method.1

2. It ignores cash flows which occurs after computation of payback period. Furthermore, anotherdrawback of such method is that it ignores time value of money.3. This is required to assess project and generate good results. Moreover, it leads to poorinvestment decisions. Another disadvantage is that it does not consider profitability of the projectwhich leads to wrong results. 4. It does not take into account subsequent investments which is considered the biggest limitationof the method (Laird and Venables, 2017.). NPVNPV is useful as it evaluates project on the basis of profitability aspect. NPV help toassess project on the basis of difference of present value of cash inflows and outflows of project.Victoria Babies Ltd can easily assess profitability of project whether to opt for expansion inabroad or any other options. There are positive as well as negative cash flows. It is recommendedby market analysts that Higher the NPV, better for the company to invest in the project. Advantages1. The advantage of NPV is that it takes into account time value of money.2. It aids in making effective decision as it rejects project having less NPV.3. NPV aids in maximising organisation's value as higher NPV of project maximisesorganisation's worth.4. It takes into account all the cash flows over a life of the project.Disadvantages 1. It is not suitable for the company as it is purely based on discounting rate.2. This inculcates complexity which is the biggest limitation of using NPV.3. NPV is merely based on forecasting and this leads to incomplete information and as such,wrong decisions are made. 4. Another disadvantage of this method is that relying on discounting rate may result into foregoof better investment projects.ARRARR is a capital investment technique which provides clarity about return on investmentmade by the company (Mayer, Breun and Schultmann, 2017). It highlights effectiveness ofproject on the basis of profitability. Basic evaluation can be made with reference to profitabilityof the project. Moreover, it is useful for extracting results in the best possible way.2

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