Investment Appraisal Report: Business Decision Making (BA4008QA)

This report provides a detailed analysis of investment appraisal techniques applied to a business case involving the selection of a machine model. The report begins with the calculation of payback periods, accounting rates of return (ARR), net present values (NPV), and internal rates of return (IRR) for two machine models, Dysn and Texla. The calculations consider initial investments, cash inflows over a five-year period, and scrap values. The report then discusses the advantages and disadvantages of each appraisal method, offering insights into their practical application. The final section provides recommendations based on the analysis, suggesting the most financially viable machine model for Dolapo Plc. The report concludes by summarizing the key findings and emphasizing the importance of using various investment appraisal techniques to make informed business decisions and enhance overall business performance.

Business Decision Making

Table of Contents
TASK-1............................................................................................................................................3
Question 1(a)...............................................................................................................................3
Question 1(b)...............................................................................................................................5
Question 1(c)...............................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................1

TASK-1
Question 1(a)
(i) Calculation of payback period:
Payback period
Cost or cash flows Dysn Texla
Investment cost
-
250000
-
400000
Cash inflow 1st year 120000 95000
Cash inflow 2nd year 90000 125000
Cash inflow 3rd year 75000 115000
Cash inflow 4th year 80000 125000
Cash inflow 5th year 10000 90000
With regard to Asset A:
The initial investment was made at 250000 and in year 1 and 2 itself gives a payback of
120000+90000=210000.This means that only 40000 need to be recover. This means that after 2
years company need to recover only 40000. And if 40000 will be divided by 75000 then it will
give 0.53. This means only approx. half month will be required to recover the cost of investment.
Thus the payback period would be around approx. 2.5 years in case of Asset A.
With regard to Asset B:
The initial investment is 400000 and in 3 years a return of 335000
(95000+125000+115000). This means that only a sum of 65000 need to be recovered. And if we
divide 65000 by 125000 the it will produce 0.52 means an approx. of half year. This means that
the payback period is 3.5 years for Asset B.
(ii) Calculation of Accounting rate of return:
ARR Method
Dysn Texla
Initial Investment =
250000
Initial Investment =
400000
Year Cash Inflows Cash Inflows
1 120000 95000

2 90000 125000
3 75000 115000
4 80000 125000
5 10000 90000
Average
Cash
Inflows 75000
Average
Cash
Inflows 110000
Average
In. Inv. 125000
Average
In. Inv. 200000
ARR
Method 60%
ARR
Method 55%
(iii) Calculation of Net present value:
Dysn Texla
Initial Investment = 250000 Initial Investment = 400000
Discounting rate
@12% Discounting Rate@12%
Year
Cash
Inflows PV Factor @ 12%
PV of
CI
Cash
Inflows
PV
Factor @
12%
PV of
CI
1 120000 0.833 100000 95000 0.833 79167
2 90000 0.694 62500 125000 0.694 86806
3 75000 0.579 43403 115000 0.579 66551
4 80000 0.482 38580 125000 0.482 60282
5 10000 0.402 4019 90000 0.402 36169
Total Cash Inflow 248502 Total Cash Inflow 328974
Less: Initial Investment
-
250000
Less: Initial
Investment
-
400000
NPV -1498 NPV -71026
(iii) Calculation of internal rate of return:
IRR Method
Dysn Texla
Initial Investment = 250000 Initial Investment = 400000
Year Cash Inflows Cash Inflows
-250000 -400000

1 120000 95000
2 90000 125000
3 75000 115000
4 80000 125000
5 10000 90000
IRR
= 20%
IRR
= 12%
Question 1(b)
Payback period:
It refers to a period which is related with the analysis of time that is being required in the
recovery of cost related with the investment. Larger the period less efficient the investment
would be (Kengatharan and Clamenthu, 2017). Also if the investment would not be able to cover
the payback period then this shows that the investment is of no worth. And the decision
regarding that investment would need to be withdraw.
This is an important technique with regard to taking decision because if the asset would
not be able to cover the investment value then making an investment in that asset is of no worth.
However, if the asset will recover the cost of investment then it will indicate the profit
percentage in the rest of its life.
Advantages:
More reliable technique, easy risk assessment, better decision making, are counted as
some of the advantages of payback method.
Disadvantages:
The main disadvantage includes the avoidance of time factor that with the passage of
time the return or cash inflows may decline and in the initial years it would be high.
Accounting rate of return:
It refers to the rate of return which is being expected from the asset or investment while
comparing with the initial cost of investment. It is one of the important concept with regard to
capital budgeting decision (Alkaraan, 2017). This type of approach is helping to determine the
overall percentage of return and expected from investment. This can easily compare assets on the
basis of price or cost of investment.
This is a major decision because if the rate of return would be in declining phase then it will
show the non-adequacy of asset or the investment. However, in terms of making comparison of

the ARR of two investments the actual decision regarding the assets and the machinery would
easy to be taken.
Advantages:
This is easy to determine along with it also enable the investor to make decision
regarding the asset in an easy mode.
Disadvantages:
It also ignores the time value of asset. This means that under this method also the time
value is not considered.
Net present value:
It is one of the best method for analysing the profitability with regard to the investment. It
is the difference between the present value of cash inflows and outflows over a period. It is an
essential tool of capital budgeting (Ogunbayo and et.al., 2019). The net present value is one of
the best option for organisation to calculate or estimate cash flow. this kind of technique is
supporting to find the appropriate investment on particular project.
Advantage:
It provide an unambiguous measure and easily estimate or calculate the overall size of
investment.
Disadvantage:
At some point, it does not represent hidden price or cost which cannot be used by
organisation.
Internal Rate of Return:
It refers to the discount cash flow technique or method which provides an actual rate or
return, earned by a project. At some point, it is also calculating the discounts rate where identify
the initial cash flow.
Advantage:
The advantage of internal rate of return which means that provide greatest potential cash
flow. it can be used in particular budget purpose.
Disadvantage:
Sometimes, it is very difficult to repair old equipment or machine but it is quickly saving
or purchase a new machine.

Question 1(c)
As per analysis, Senior management of Dolapo Plc under each technique and state which
A –machine return a maximum investment. That’s why, company has suggested to use machine-
A in future uses. On the basis of calculation, it has been estimated the initial investment, which
was made at 250000. It means that increases the overall demand of machine-A and doing work
an efficient way to improve overall performance and efficiency. The recommendations has made
on the basis of the recover rate. Therefore, company has been gained more profitability and
productivity in marketplace. This means only approx. half month will be required to recover the
cost of investment.
CONCLUSION
From above discussion, it has been summarised about the different kind of investment
appraisal technique or method such as pay back, new present value, accounting rate or internal
rate of return. These are considerations of various kind of technique which may support for
representing the overall scope of investment in the organisation. Furthermore, it has been
described the estimation or calculate the return of investment for targeting machine. On the basis
of recommendation, it has been adapted the suitable machine in enterprise which help to identify
the role of machine in business performance enhancement
.

REFERENCES
Books and journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. In Advances
in Mergers and Acquisitions. Emerald Publishing Limited.
Anderson, T.D., Ford, R. and Hamilton, M., 2017. Building Your Personal Leadership
Development Plan. In Transforming Leadership (pp. 248-261). Routledge.
Kengatharan, L. and Clamenthu, D.P., 2017. Use of capital investment appraisal practices and
effectiveness of investment decisions: a study on listed manufacturing companies in Sri
Lanka. University of Jaffna.
Ogunbayo, O.T. and et.al., 2019. The significance of real estate development process analysis to
residential property investment appraisal in Abuja, Nigeria. International Journal of
Construction Management. 19(3). pp.270-279.
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