Analyzing Investment Appraisal and Brexit Impact on Irish Economy

This report provides a comprehensive analysis of investment appraisal methods and the economic challenges posed by Brexit, particularly focusing on its impact on Irish firms. The first part discusses six key considerations for making capital investment decisions, including cash flow forecasting, rate of return, tax effects, resource availability, and competitive advantage. It also evaluates three investment appraisal methods: payback period, net present value (NPV), and internal rate of return (IRR), highlighting their advantages and disadvantages. The second part delves into the economic challenges of Brexit and its significant impact on the Irish economy, emphasizing the potential risks to Irish businesses due to the close trade and investment relationship with the UK. The report notes the potential for job losses, economic output decline, and disruption to political stability, particularly in the agri-food sector, and recommends proactive measures for diversifying Ireland's trade base to mitigate these adverse effects. Desklib offers this document as a valuable resource, providing students with access to past papers and solved assignments for enhanced learning.

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Finance and Wealth Management

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Part A
Six considerations that need to take into account before deciding to invest
Capital investment decisions requires huge outflows of cash and management encounters
various obstacles while making the decisions that involves acquisition of new assets or
acquisition of company. There can be two main forms of investment that should be considered
by the management. These forms of investment can be independent investment and exclusive
investment. In independent investment, the implementation of the project will not impact the
cash flows of other business units in the same company. On the other hand, taking up the
exclusive investments will definitely impact the competing business units. For example, if
company takes the decision of buying the company it will have impact on all the business units.
There are so many variables or factors that need to be considered but it is management
duty to prioritize the most important factors that need to be considered before making the
investment decision:
 Calculation and forecasting the cash flows or payoff: Firstly, it is important to
consider the cash flows and payoff that will be created by the new investment. It can be
done through market survey or performing detailed analysis of the project to be
undertaken. If more than one project is under evaluation at the same time it is important
to look after the project time period and investment needed by each project as these two
factors can helps to judge two the mutually exclusive projects together. Project payoff
can be evaluated through the application of payback method and accounting rate of return
method. Payback period method helps to reveal the expected time required to recover the
investment made in the project. While accounting rate of return will help to filter the best
investment opportunities on the basis of return generated by the project. Both of these
methods do not consider time value of money. As every project goes through various
issues whether internal or external, it is the duty of management to develop the
discounting model that takes up into consideration the external drivers and other
important variables as per the business model (Higgins, 2012).
 Rate of Return and value of time: It is essential to consider the future cash flows of
money and its present value. Net present value (NPV) method helps to evaluate the
present value of future cash flows and initial investment. Net present value takes into
account the time value of money as it discounts the future cash flows using the cost of
capital of the company. Project is profitable when present value of cash inflows is greater
than the present value of cash outflows.
 Assessing the acceptability of investment: It is essential to consider the internal rate of
return of the project because it is the actual return that can be earned on the project if
taken by the company. If IRR is greater than the cost of capital of the company than the
project will profitable and will provide good return to company.

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 Consider the tax effects on the company: It is important to make sure that all the cash
flows used to evaluate the investment decisions must be after tax cash flows. Tax
calculation must be accurate and dependable on the company maximum marginal tax rate
applicable on the company. To make sure the accuracy of the cash flows it is important to
have accountability on the cash flows calculations and it accuracy.
 Availability of resources: It is important to consider the availability of resources
required to take up the project. Resources such as human capital, funds, technology, legal
liabilities, and other pre-requisites are essential to take the project. It is management duty
to look after these resources before taking up the projects. Any project with very high
IRR and NPV is useless if it cannot be executed due to non availability of proper
resources (Deegan, 2013).
 Competitive advantage: When any investment decision is taken whether buying the
company or any fixed assets it is worth to look for the competitive advantage that such
project will give. For example, change in technology can put the company one step ahead
of competitor if such technology is not available with the competitor.
The three methods of investment appraisal together with their advantage and
disadvantages
Payback Period Method: This method investment appraisal is easy to calculate as it does not
take into account the time value of money. This method provides the time taken to recover the
initial investment through realizing the earnings from the project. This method is generally
expressed in number of years and it can be calculated through dividing cumulative earnings of
each year with the initial investment.
The main advantage of payback period method is that it is simple and easy to compute
and very easy to understand. The most significant benefit of payback method is that it uses actual
cash flows project to make the decision and this method make sure the availability from the
project (Brigham and Houston, 2012).
On the other hand, major disadvantage of payback method is that it does not consider the
time value of money. The cash flows that are generated after the payback period is completely
ignored that makes it useless for the cash flows generated. This method does not consider the
length of investment that it is very important factor.
Net Present value: This method of investment appraisal is the most widely used method as it is
considers time value of money which is ignored by payback method and accounting rate of
return method. This method used the present values of cash flows to measure the profit generated
by the project. In short it can be said that this method refers to the present value of expected
future cash flows less the initial investment. Mostly the cost of capital of the company is taken as
the discount rate for calculating the present value of future cash flows.

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The major advantage of net present value of method is that it considers the time value of
money which is the most significant consideration for any project. Unlike Internal rate of return
method, NOV does not consider that cash flows generated during the project is again invested as
it is quite impossible to reinvest the cash flows in project that provide similar returns to the
company. Net present value method takes into account various risk factors that are important for
any project (Brigham and Ehrhardt, 2013).
Net present value method does not take sunk cost as it is not regarded as an element of
decision making. The change in cost of capital after the project is undertaken will be ignored and
this project does not take into account the difference in size of project.
Internal Rate of Return: This method provides the percentage of rate which is actually earned
on the project. When IRR is greater than the cost of capital the project is accepted otherwise it is
not accepted.
The main advantage of this method is that it is based time value and takes into account
that cash flows generated are available for reinvestment. On the other it is very difficult to
calculate as it is based on some hurdle rate like cost of capital (Baker and Nofsinger, 2010).

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Part B
Discussion of economic challenges of Brexit and the impact on Irish firms
‘Brexit’ is a term that refers to the exit of the UK from the European Union (EU) that was
an economic and political partnership involving about 28 European countries. EU was mainly
developed for promoting economic co-operation between the member countries to ensure their
sustainable and steady development by fostering greater trade and creating a single currency euro
(Lee, 2016). The development of a single market by the creation of EU enables greater
movement of good and people from one country to another and thus promoting the economic
development. UK is however planning to leave the EU by the year 2019 for regaining its
sovereignty and promoting internal migration and reducing the burden of economic regulations.
The decision of the UK to leave the EU will have a larger impact on the economic and political
well-being of the member countries.
It has been stated by the International Monetary Fund (IMF) that Ireland is regarded as
one of the major country that would have a major significant economic impact of Brexit. As
such, it is important to examine the significant impacts of Brexit on Ireland for assessing its
future growth potential. The major potential risks exist in relation to the businesses of Ireland as
UK is regarded as an important partner for Ireland that is measured in terms of both trade and
investments (Ireland & the Impacts of Brexit, 2017). Irish exports as well as import a large
number of goods and services to and from the UK and it are also regarded as an important
destination for the FDI of Ireland. It is estimated that UK supports about 80,000 jobs within
Ireland and therefore it can be stated that in comparison to other member countries of the EU it is
highly dependent on trade with the UK. This makes Ireland highly vulnerable to negative impact
of the Brexit causing the need for the country to diversify its trade base after UK leaves the EU
(Lee, 2016).
IMF has estimated that Brexit could results in 50, 0000 jobs losses and a large drop in the
economic output. It has been argued by various experts that a hard Brexit could result in
deteriorating the peace within Ireland by negatively impacting the economic growth and
development within the country. Hard Brexit refers to completely eliminating the close
alignment between the UK and other member countries as it would result in leaving both the
single market and the customs union. It has been predicted that in the scenario of hard Brexit the
overall export would be declined to about 3.7 per cent below till the end of the year 2020 and
thus have a negative impact on its GDP (Connelly, 2017). This could result in completely
disrupting the economic and political stability within the Ireland due to its larger dependence on
the UK as can be depicted by the following figure:

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(Source: https://dbei.gov.ie/en/Publications/Publication-files/Ireland-and-the-Impacts-of-
Brexit.pdf)
The intensity of the negative impact of Brexit would be larger within Ireland as it is
having a common border with the UK and thus there exists a close value chain between the
member countries. The SME’s of the Ireland are largely dependent on the UK for trade and
therefore Brexit could negatively impact the chances of their future survival. The largest impact
of the Brexit is estimated to be faced by the agri-food sector of the country as it is having large
import dependency on the UK for certain specific food products such as beef, dairy and
processed foods (Irish economy is growing substantially but Brexit 'poses major threat, 2018).
The announcement of the Brexit is already having a negative impact on the growth and
development of the Irish companies with the sharp decline in the exchange rate between the
countries. It would also impact the investment decisions of multinational companies as the
companies that have invested to serve the UK market can consider relocation. It has been
announced by the Irish Ministry of Finance that Brexit is estimated to cause a large negative
material impact on the economy of Ireland. This is largely on account of the adverse effects on
the Irish production and ultimately the GDP of the country. The high exposure of Brexit to the
Ireland in terms of trade and investment could potentially result in degrading its economic
performance. Thus, the government of the UK is recommended to adopt proactive measures for
diversifying its trade base in order to regain its political and economic stability (Murphy, 2018).

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References
Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and
Markets. John Wiley & Sons.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage
Learning.
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Connelly, T. 2017. Brexit and Ireland: The Dangers, the Opportunities, and the Inside Story of
the Irish Response. Penguin UK.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Ireland & The Impacts Of Brexit. 2017. [Online]. Available at:
https://dbei.gov.ie/en/Publications/Publication-files/Ireland-and-the-Impacts-of-Brexit.pdf
[Accessed on: 26 November 2018].
Irish economy is growing substantially but Brexit 'poses major threat'. 2018. [Online]. Available
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November 2018].
Lee, T. 2016. Why did Britain vote to leave the EU? [Online]. Available at:
https://www.vox.com/2016/6/25/12029962/why-did-britain-leave-the-eu [Accessed on: 26
November 2018].
Murphy, S. 2018. How brexit could affect the irish economy and possible solutions. . [Online].
Available at: https://irishtechnews.ie/how-brexit-could-affect-the-irish-economy-and-possible-
solutions/ [Accessed on: 26 November 2018].