Business Finance Assignment - Investment Appraisal and Time Deposits

This assignment solution addresses key concepts in business finance, focusing on investment appraisal techniques and time deposits. The solution begins by defining and comparing various investment appraisal methods such as payback period, Internal Rate of Return (IRR), Profitability Index (PI), and Net Present Value (NPV), evaluating their strengths and weaknesses. It then explores the practical challenges in applying these techniques, particularly in making reliable cash flow projections and determining appropriate discount rates. The solution also provides a comparative analysis of two time deposit options offered by different banks, calculating the maturity values and recommending the more profitable investment based on the provided interest rates and compounding periods. The assignment references relevant financial literature to support the analysis.

1
Business finance

2
Table of Contents
Question 1..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................3
c).............................................................................................................................................4
d)............................................................................................................................................4
Question 2..................................................................................................................................4
References..................................................................................................................................6

3
Question 1
a)
The investment appraisal techniques are used to make the decision in relation to any project
and for that various criteria are specified which are discussed below:
Payback period: Under this, the acceptance will be made if the payback period is less than the
maximum acceptable duration of the payback period. In the case of a higher payback period
the project will be rejected (Gorshkov et al., 2018). The demerit is that it does not consider
the returns and the time value of money in calculations.
IRR: The IRR is the rate at which NPV will be zero and so if the IRR will be higher than the
cost of capital then the acceptance will be provided otherwise the project will be rejected.
Under these various important factors are ignored such as future cost, and project size and
that is the main limitation with the method.
Profitability Index: The acceptance of the proposal will be made when the PI will be higher
than 1 and at 1 the company will be indifferent whereas if the PI will be lesser than 1 then the
rejection will be made. The process of determining the rate of return under this approach is
difficult and the projections which are made are optimistic which makes this approach less
viable.
Net present value: This will be used for the evaluation and with positive NPV the project will
be considered and in case of negative NPV the rejection of the project will be done. The
sensitivity which is involved in relation to the discount rate is its main disadvantage. If the
incorrect rate will be chosen then the whole process will prove to be incorrect and the
decision will not be considered reliable.
b)
In the application of investment rules, various difficulties will be faced and the most
important is to make the reliable projection of cash flows. There is the use of a discount rate
and it is not easy to ascertain the same. The whole calculation is based on the assumptions
and so it is difficult to place complete reliance on them. In case of wrong estimates, the
complete rule will fail and no correct decision will be undertaken.

4
c)
The approach which will be easiest to be implemented is the payback approach as in that no
complex calculations are involved. The projections will be required regarding the cash flows
but after that, the calculation is made in a very simple manner and can be understood by all
without any specific skills.
d)
The best investment rule to be applied is net present value as in this the time value of money
is considered. Under this, the profits are also considered and the approach which is used is
considered to be realistic (Pasqual, Padilla and Jadotte, 2013). The discount rate is used and
with that, the mutually exclusive projects can also be evaluated in an effective manner.
Question 2
Time deposits are made with the bank to earn an adequate return on the investments and in
that there will be need to evaluate the rate appropriately so that correct decisions can be made
(Ahlswede et al., 2012). The two options are available in the given case and it is assumed that
$10000 will be invested. The calculations to make the decision are shown below:
ABC bank:
Rate of interest: 11.2% compounded monthly
Amount: $10000
Time: 1 Year
Maturity value = Present value * (1+r)n
= 10000 * (1+(11.2/12))1*12
= 10000*(1.0093333)12
= 10000*1.1179
= $11179
XYZ bank:

5
Rate of interest: 11.4% compounded semi-annually
Amount: $10000
Time: 1 Year
Maturity value = Present value * (1+r)n
= 10000 * (1+(11.4/2))1*2
= 10000*(1.057)2
= 10000*1.1172
= $11172
It can be noted that the maturity amount which is derived for the one year deposit is higher
with the ABC bank and so the investment shall be made in same.

6
References
Ahlswede, S., Schildbach, J., Speyer, B., AG, D.B. and Mayer, T. (2012) Poised for a
comeback: Bank deposits. Deutsche Bank, DB Research, pp.1-16.
Gorshkov, A.S., Vatin, N.I., Rymkevich, P.P. and Kydrevich, O.O. (2018) Payback period of
investments in energy saving. Magazine of Civil Engineering, (2).
Pasqual, J., Padilla, E. and Jadotte, E. (2013) Equivalence of different profitability criteria
with the net present value. International Journal of Production Economics, 142(1), pp.205-
210.

7