Financial Management Report: GPS World S.A.L. Investment Appraisal

This financial management report provides an analysis of investment appraisal techniques applied to a project for GPS World S.A.L. It includes calculations and interpretations of the Modified Accelerated Cost Recovery System (MACRS) depreciation schedule and an income statement for the company. The report delves into the payback period, both simple and discounted, evaluating its effectiveness in determining project viability. Furthermore, it assesses the project using other investment appraisal techniques, specifically Net Present Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), and Profitability Index (PI). The report concludes with a comprehensive evaluation of these techniques, offering insights into the project's potential profitability and feasibility for GPS World S.A.L., supported by references to relevant literature.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................3
Answer to Question 3:.....................................................................................................................4
Answer to Question 4:.....................................................................................................................5
References:......................................................................................................................................8

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Answer to Question 1:
MACRS depreciation schedule:
Income statement of GPS World S.A.L. for years 1-6:

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Answer to Question 2:

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Answer to Question 3:
In the words of Andor, Mohanty & Toth (2015), payback period is defined as the time
needed for recovering the overall investment cost. With the help of payback period, it is possible
to ascertain for an organisation whether a project could be undertaken or rejected, since greater
payback periods are typically not desirable for investment alternatives. However, this method
fails to take into consideration the time value of money and it ignores the negative impact of
inflation as well (Baum & Crosby, 2014). Payback periods could be of two types, which are
described as follows:
Simple payback period:
In case of GPS World S.A.L., it could be observed that the simple payback period of the
project is computed as 3.09 years. The lower the payback period, the better it would be for the
above organisation. In addition, the economic life of the project is observed to be 6 years and the

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organisation could recover its initial investment before the project is finished. Thus, based on
simple payback period, it could be cited that the project would be profitable for GPS World
S.A.L.
Discounted payback period:
Discounted payback period is an improved version of the simple payback method that
provides the amount of time to reach break-even from undertaking the initial expense by
discounting the future cash flows along with realising the time value of money (Burns & Walker,
2015). If the discounted payback period is lower than the economic life of the project, it indicates
that the project is viable to be undertaken from the organisational perspective. From the
perspective of S.A.L., it could be observed that the economic life of the project is shorter in
contrast to the discounted payback period, as the later is obtained as 4.58 years. This is lower
than the economic life of the project and hence, it could be accepted for improving the
profitability of the organisation.
Answer to Question 4:
Referring to the above table, the other investment appraisal techniques that have been
taken into consideration include NPV, IRR and MIRR and they are evaluated in the context of
the given project as follows:
Net present value (NPV):
One of the most significant techniques of investment appraisal is considered as NPV,
which is obtained by subtracting the present value of cash outflows from the present value of
cash inflows (Johnson & Pfeiffer, 2016). This measure is used in capital budgeting, since this

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would enable in evaluating the profitability of a project or investment. In case, the net present
value is obtained as positive, it indicates that the estimated earnings would exceed the estimated
costs. This measure considers the time value of money at the time of dissecting the feasibility of
a project and thus, it is considered as the superior measure of capital budgeting. In this case, the
NPV of the project is obtained as LL769,949,831, which is higher than the initial outlay of the
project. Thus, from the viewpoint of NPV, the project is feasible for the organisation to increase
its overall productivity and profitability.
Internal rate of return (IRR):
This is a rate of discount, which makes the NPV of cash flows from a special project
identical to nil. This a return that an organisation expects to earn from the overall investment
made in the project (Lefley, 2018). If the internal rate of return is higher than the cost of capital
of a specific project or investment, it needs to be accepted. For the project of GPS World S.A.L.,
it could be identified that the internal rate of return as 19%, which is higher than the cost of
capital of 11.5%. Hence, the project would be profitable is obtained for the organisation.
Modified internal rate of return (MIRR):
MIRR is a technique, which assumes that positive cash flows are reinvested at the cost of
capital of the organisation, while the initial investments are financed at the financing cost of the
organisation. The higher the MIRR, the better is the possibility of generating higher revenues for
the organisation. In this case, MIRR is computed as 15%, which is higher than the cost of capital
of 11.5%. Thus, the project needs to be accepted.
Profitability index (PI):

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This index helps in identifying the costs and benefits associated with a particular project
(Sims, Powell & Vidgen, 2015). If the index is above 1, it could be stated that the project is
profitable for the organisation. In case of GPS World S.A.L., profitability index is obtained as
1.20, which depicts the viability of the project.
Thus, based on the evaluation of all the investment appraisal techniques, it could be
inferred that the project would help in increasing the overall profitability of GPS World S.A.L.

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References:
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, 148-172.
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Burns, R., & Walker, J. (2015). Capital budgeting surveys: the future is now.
Johnson, N. B., & Pfeiffer, T. (2016). Capital budgeting and divisional performance
measurement. Foundations and Trends® in Accounting, 10(1), 1-100.
Lefley, F. (2018). Dispelling the Myth Around the Financial Appraisal of Capital Projects. IEEE
Engineering Management Review, 46(1), 47-51.
Sims, J., Powell, P., & Vidgen, R. (2015). Investment appraisal and evaluation: preserving tacit
knowledge and competitive advantage. International Journal of Business and Systems
Research, 9(1), 86-103.