Strategic Financial Management Assignment (Doc)

Prepare a report to the
Directors of AYR Co. which
includes the following. 1. A
calculation of the N

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
1. Calculation of Net Present Value, Internal rate of return and Payback period for both
Project Aspire and Wolf..............................................................................................................1
QUESTION 2...................................................................................................................................5
1. Recommendation for undertaking project...............................................................................5
2. Justification for recommendation for evaluating investment appraisal techniques................5
3. Summary of other factors for taking final decision................................................................6
QUESTION 3...................................................................................................................................7
1. Description of debt and equity................................................................................................7
2. Explanation of cost of each finance source.............................................................................8
3. Analysis of AYR Co.'s weighted Average cost of capital......................................................9
4. Assessing impact of selection of finance on current and potential lenders and shareholders
...................................................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Investment appraisal is referred to as collection of techniques which are applicable for
determining attractiveness of a particular investment. The present report will critically apply,
assess and evaluates techniques and issues for strategic financial management. This report will
provide significance of net Present value, Internal rate of return and payback period with its
calculation and appropriate interpretation. It will be providing appropriate analysis of option for
investment project along with recommendation and justification. In the same series, it will also
provide summary of factors which must be considered for taking final decision about selecting
project. Further, cost of debt and equity would be provided with proper explanation of cost and
assessment of impact for choosing finance with context of potential shareholders and lenders.
QUESTION 1
1. Calculation of Net Present Value, Internal rate of return and Payback period for both Project
Aspire and Wolf
Net Present Value: It is referred to as value of future cash flow over life of particular
investment which is discounted. This analysis is stated as valuation of intrinsic form which is
applicable in extensive aspect in whole accounting and finance for identifying business's value,
capital project, investment security, cost reduction program, new venture and engagement of
cash flow. Generally, it is used for identifying amount of investment project along with series of
worth cash flow (Al-Mutairi, Naser and Saeid, 2018). It is stated as encompassing metric which
is accounted as expenses, revenue and association of capital cost along with investment in Free
Cash Flow.
By factoring cost and revenue, it considers timing of cash flow whose outcome have huge
impact on investment's present value. In the similar aspect, cash flows are discounted because of
adjusting risk in opportunity of investment and for accounting time value of money. It is
necessary as each business does not have similar level of risk. In simple words, risk could be
accounted and there is presence of high discount rate for riskier investment and less for safe one.
NPV is also required for interest rate, opportunity cost and inflation where money is valuable
when it is received.
Project Aspire
Net present value
1

Year Cash flow 10.00% PV at discounted
1 579000 0.9091 526364
2 616542 0.8264 509539
3 656911 0.7513 493547
4 700318 0.6830 478327
5 746994 0.6209 463825
Total cash 2471601
Cash outflow 2250000
Net present value 221601
Interpretation: The above table is indicating net present value of Project Aspire as its
final outcome of this investment is worth $221601. In simple words, AYR Co. has will to repay
$221601 each year over 5 years.
Project Wolf
Net present value
Year Cash flow 10.00% PV at discounted
1 762080 0.9091 692800
2 762296 0.8264 629997
3 762366 0.7513 572777
4 762292 0.6830 520656
5 762073 0.6209 473188
Total cash 2889417
Cash outflow 2250000
Net present value 639417
Interpretation: The above table is signifying net present value of Project Wolf of worth
$639417. In other way, organisation has capability to pay its net present value in each year over
5 years.
Internal rate of return: It is replicated as discount rate which makes NPV of specific
project as zero. In simple words, this return is on expected rate which would be gained on
particular investment or project. For the calculation of IRR, expected cash flow of any
2