Report: Capital Investment Appraisal, Financing, and Objectives

This report delves into capital investment appraisal techniques, evaluating two mutually exclusive investment proposals using methods like Net Present Value (NPV), Payback Period, Accounting Rate of Return, and Internal Rate of Return (IRR). It analyzes the strengths and weaknesses of each method, explaining why the results of NPV and Payback Period differ, and why the IRR exceeds the cost of capital. The report then explores suitable external sources of long-term finance, including debentures and bank loans, considering their advantages and implications on the company's capital structure. Additionally, it examines types of electronic hardware and software suppliers, the contracting process, and the legalities involved in purchasing and supply. Finally, the report assesses the most appropriate financial objective for the organization, comparing profit maximization, revenue maximization, and shareholder value maximization.

BUSINESS REPORT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
a) Utilization of the capital investment appraisal measures.........................................................1
b) Suitable alternatives for the external sources of long term finance.........................................1
c) Types of electronic hardware and software suppliers, contracting process and the legalities
for the purchases and supply........................................................................................................2
d) Most appropriate financial objective among the profit maximization, revenue maximization
and shareholder value maximization...........................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
The investment appraisal techniques are applied on the various capital investment
proposals in order to evaluate the attractiveness of these alternatives. Based on the results then
the company shall be selecting the best proposal capable of maximizing the benefits that are
attained by the company in terms of profit margin, increased sales revenue, the quickest payback,
regular working capital generation, investment requirement and the feasibility of the project for
the business. The current project shall be highlighting over the two mutually exclusive
investment proposals and their suitability for the business in its application. It shall be reflecting
the most commonly used investment appraisal techniques and their usefulness for the business.
The report shall be discussing on the alternative external sources of long term finance that the
company can use in order to arrange funds for the investment. Apart from that the report shall
also be presenting on the types of the electronic hardware and software suppliers, the contracting
process and the legalities that are to be considered in the purchasing and supplying process.
Lastly it shall be analysing the most appropriate financial objective for the organization.
TASK
a) Utilization of the capital investment appraisal measures Net Present Value – The net present value is used to analyse the profitability of the
various investment proposals and based on that the proposal generating the highest net
present value which is highest returns shall be selected by the company. Payback Period – The payback period shall be utilized in assessing the time period which
is taken to receive the initial investments back by the organization (Alkaraan, 2017). The
investment option with the quickest payback period shall be applied by the company. Accounting Rate of Return – Accounting rate of return can be used to govern the
expected rate of return that a capital investment can generate. It is one of the quickest
way of identifying the profitability of a given alternative. Internal Rate of Return – The internal rate of return can be calculated to find out the
minimum rate of return that is sufficient to cover the outflows pertaining to particular
investment. It is where the net present value is zero.
Recommendation
All the investment appraisal techniques have some pros and cons and this is the reason
that it has to be analysed that which is the most appropriate among them to identify the most
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profitable options among the various profitable alternatives. There are some criticisms like the
net present value cannot be used to evaluate and compare the investment proposals that are
having distinct sizes of the initial investments that are made to acquire or install the projects.
Since in the current scenario it can be observed that the initial investments are different so this
method shall remain unsuitable.
Apart from that the internal rate of return which is otherwise a superior method cannot be
used in the case of the mutually exclusive projects. But since in the present case the company
shall be choosing one from the two mutually exclusive projects, so the internal rate of return
method cannot be opted for the appraisal process. Another method is the accounting rate of
return which accounts for the profit rather than the cash-flows that are generated by the company
which is that the depreciation which is a non-cash expense shall also be counted. So this is also
rejected as the single choice for the capital budgeting. Lastly the payback period method which
also has certain disadvantages like it does not consider the time value of money but can be
comparatively used for the evaluation process.
Reason for the difference in the results of NPV and Payback
While comparing the both projects it can be assessed that the results pertaining to the two
techniques used which are Net Present Value and Payback are different for both the investments.
As per the investment appraisal technique of NPV it can be evaluated that the proposal B15 shall
be selected as it is offering the higher NPV or the profitability to the business (Baum, Crosby and
Devaney, 2021). But in accordance with the payback period technique it can be assessed that
A10 must be selected as the initial investments of the company are returned early in this project
which is in 2 years and 10 months.
The difference pertaining to the both calculations are arising due to the fact that the
payback period shall not be considering the time value of money, inflation risk or the various
financing alternatives and the cost pertaining to it. Also, it does consider the time period which is
there post the payback period is attained.
Why IRR shall be in excess to cost of capital
The finance director of T Ltd was very confident while quoting that the internal rate of
return of both the projects shall be well in excess of 15% that is the estimated cost of capital for
the company. The major reason behind this is that the internal rate of return for the company
shall be established at the point where the net present value for the investment is zero. The
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internal rate of return depicts the rate that is minimum just sufficient to cover the costs and
generate the zero level of profitability. Since by discounting the cash flows at 15% cost of capital
the investments generated the positive NPV so thereby the financial manager could confidently
assess that for bringing down the net present value to zero it shall have to increase the rate of
such discounting for the investments so that the thought results could be generated. This is the
reason that the internal rate of return of both the projects shall be higher than the cost of capital
that is 15%. in order to decrease the value of NPV the rate of discounting has to be decreased by
the company. So, the IRR of A10 ad B15 is 25% and 20% respectively which is higher than the
cost of capital taken by the company.
Other factors impacting the investment decision
The other factors that can impact the investment decision in a company are efficiency of
human capital, technological advancements, capital requirement and scope of operations in the
business. These factors are also to be considered while formulating an investment choice in the
business otherwise it will decrease the efficiency of the investment made by the company.
b) Suitable alternatives for the external sources of long term finance
In order to arrange for the long term finances in the company can opt for both the owned
and borrowed funds and can select among the various alternatives that are available with them.
But since the company T limited is already 100% equity financed so in order to balance the
capital structure of the company the sources of debt funds can be used to finance the capital
investments in the business. Among the debt funds the most suitable alternative options that are
available with the company are:- Debentures- The debentures is one of the most commonly used alternative for the long
term sources of finance for the company which is issued in the form of bond. The funds
that are provided are in the borrowed capacity, and so they shall carry a fixed rate of
interest that shall be paid to the creditors. They are in the form of document issued named
debentures specifying that the amount shall be repayable in future and until then the
interest shall be paid at the regular interval by the company (Leon, 2019). They do not
dilute the control but impose the fixed financial charges on the company. This is a more
secure kind of investment for the investors as in case the company is unable to pay the
loan they can take charge of the assets. This is the reason that arranging the funds from
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this source shall be comparatively easy and also efficient as it shall not provide
ownership and control to the investors.
 Bank loan- The bank loan is another major source of finance that is used by the company
in order to arrange the finances for the utilization in the capital investments that shall be
generating the long term efficiency for the company. They are the external sources
through which the company can obtain the medium and long term debt capital for the
company (Al-ali, 2021). The loan that is provided by the bank has fixed repayment period
and also the fixed rate of interest at which the regular payments of interest are to be made
by the company. There can be the different motives of the business that can be satisfied
through obtaining the required amount of loan. It can be assessed that the company if
provides a viable plan to the bank then they shall be getting the loan based on the risk
assessment made by the financial analyst. These loans are provided against the collateral
security to the company and in case the company is not able to repay the loan the security
shall be confiscated. This is also secure form of financing that is generally preferred by
the company having good credibility score. They are also effective for the company as
they shall not be diluting the ownership and control of the company.
These are the both types of the sources that can be availed by the company and can arrange the
long term sources of finance from the available alternative external sources. These shall be
posing the company with the fixed financial charges that they have to pay even though they earn
the profitability or not. In case of their insolvency also the creditors shall be taking the charge of
the assets of the company. This is safe and secure from both the company and the investor's
perspective.
c) Types of electronic hardware and software suppliers, contracting process and the legalities for
the purchases and supply
The electronic hardware and software suppliers can be of 4 different types:- Manufacturers and vendors – The manufacturers are the ones who develop and create
their own electronic hardware and software (Raj-Reichert, 2019). The company shall be
opting for purchasing from the manufacturers in case the required material is not readily
available and they have ordered to create it with the customized functions. Wholesalers and distributors – The wholesaler are the types of hardware and software
suppliers that shall be storing the material in bulk after purchasing it. Then further they
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shall be selling it to small businesses in smaller quantities. These wholesalers have large
volume of these materials and they store it in large storage spaces from where it shall be
supplying it to the businesses. The only disadvantage for the company is that these are
readily available and so hey cannot be customized as per the company expectations. Independent and trade show REPS – They are another form of suppliers of the
electronic hardware and software materials who are indulged in creating their own
version through the skills they possess. They are in the form of independent craftsperson
who shall be developing the materials in small quantities with customization as required
by the client (Krüger, Hardung and Kölzow, 2017). They are famous for conducting
individual piece of work for the particular client's order. Importers- Another option available with the company is by importing the material from
the foreign countries in higher volume and larger sizes that are cost-efficient for the
business. These bulk quantities are purchased at the discounted price by incurring the
additional expenses of shipping and transportation charges. They are also superior quality
wise and can also be better technology oriented in nature.
Contraction process
The contraction process shall be conducted by the companies so that they can arrange or
the electronic hardware and software materials for the company. It shall start with the sourcing
and selecting the required materials that shall be appropriate for the company needs. Further it
shall be ordering for the same and making the payments. The next step shall be including the
budget authorization and the invoice processing post the supply requisitions are received. The
other requirement is related to the supplier management in terms of managing the relationship,
information management, maintaining the databases and generating the required performances.
Legalities for the purchase and supply of the electronic hardware and software
 The industrial policy in relation to the electronic hardware and software has been
redefined and that is the reason that licensing requirements have been virtually abolished
and the setting up of the manufacturing plants is easy.
 There is no reservation of the public sector enterprises and so many private giants have
been established in the area.
 The industries can be set up anywhere in the country but the only problem is that they
have to obtain the clearance from environment pollution control and zoning authorities.
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 The small and medium enterprises whose investment stays less than 10 crore need to get
registered with District Industries Centre (DIC).
d) Most appropriate financial objective among the profit maximization, revenue maximization
and shareholder value maximization
There are different types of financial objectives of the business for which the operations
of the business are performed. These objectives can contribute to the growth and development of
the organization and the prosperity helps in surviving the competition in the market. Apart from
that it can also be analysed that the various objectives pose some benefits to the organization but
are also criticized at the other hand regarding their sufficiency in respect of the company, these
are some major financial objectives of the business:- Profit maximization- The profit maximization can be one of the objectives of the
business wherein they try to boost the returns that are generated on the operations of the
company. The increment in the earnings can be either due to the reduction in the
expenses or it can be due to the attainment of the economies of scale leading to the
reduction in the per unit cots of the company ad simultaneously increasing the profit
margin of the organization (Danley, 2019). The increased profits are the sign of the
efficiency in the operations of the company and this additional returns can either be used
as the retained earnings to finance the future operations or it can be used to provide
dividends to the shareholders. This can be one of the short term objectives of the business
that shall be providing the business an edge over the other competitors in the market. But
this can for sure not ensure the long term stability and growth prospects for the
organization. The various criticism in respect of the profit maximization as the financial
objective of the business are stated like the objective does not consider the risk factors,
time value of money, share prices, brand value of the business. Since all these factors are
missing it cannot be considered as the most appropriate and the effective financial
objective of the business. Revenue maximization- The revenue maximization objective of the business also known
as the sales maximization objective of the business is among the most significant
objectives of the business wherein the company shall be boosting its position in the
market by increasing the level of the sales that are executed in the particular financial
year of the company. This can further lead to the undertaking of the smooth and efficient
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operations of the business. It shall be bringing the benefit in terms of the profit, growth,
sustainability, increased market share, status, prestige, increased share prices etc. But it
cannot be considered as the sole objective of the business as it cannot be second priority
of the business and the various stakeholder that it has impacted by the business decisions
(Financial Objectives, 2021). This cannot be considered as the most suitable and
appropriate financial objective of the business as it does not define any level of financial
stability and efficiency for the company.
 Shareholder value maximization- The wealth and value maximization of the
shareholders is one of the primary objectives of the business that has to be followed so
that the growth and prosperity for the business can be defined for the company (Satta, and
et.al., 2020). The market value of the company can be determined through the market
prices of the shares and which are dependent on the factors like the shareholders
expectations, profitability, future growth prospects, distribution of the returns, risk profile
etc. These are the only factors that derive the worth of the business and so the company
must on priority focus to increase the market value of the shares in the business which
shall maximize the value of the shareholders and also derive value and growth for the
business. This shall be serving as the index for the overall performance that is generated
by the company and shall be generated by the company in the future.
So it can be analysed for T limited the most appropriate objective shall be shareholder value
maximization as the company is 100% financed by the equity sources of funding and so
shareholders form an important part of the business. And this the reason that they are to satisfied
to the extent that the value is derived for the business and the business objectives in terms of
profitability and the future growth prospects are developed for the company.
CONCLUSION
It can be summarized from the above project that there are various sources of finance that
can be used by the company to obtain the funds like the equity, debentures, bank loan, venture
capital etc. all of which are having some pros and cons for the business and are to be accordingly
used in the business. Apart from that shareholder value maximization is the major financial
objective of the company which shall be deriving satisfaction to the shareholders and increase
the value of the business. There can be different forms of the suppliers from whom the materials
in relation to the electronic hardware and software can be obtained like the manufacturers,
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wholesalers, independent craftspersons and the importers from whom the material can be
arranged through following the contraction process and by abiding the various legalities.
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REFERENCES
Books and Journals
Al-ali, A. H., 2021. SOURCES OF FINANCE AND THEIR ROLE ON SMALL BUSINESS
SUCCESS IN JORDAN. Academy of Entrepreneurship Journal. 27(1). pp.1-13.
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. In Advances
in Mergers and Acquisitions. Emerald Publishing Limited.
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Danley, B., 2019. Forest owner objectives typologies: Instruments for each owner type or
instruments for most owner types?. Forest Policy and Economics. 105. pp.72-82.
Krüger, A., Hardung, B. and Kölzow, T., 2017. Reuse of software in automotive electronics.
In Automotive embedded systems handbook (pp. 8-1). CRC Press.
Leon, F., 2019. Long-term finance and entrepreneurship. Economic Systems. 43(2). p.100690.
Raj-Reichert, G., 2019. The role of transnational first-tier suppliers in GVC governance.
In Handbook on Global Value Chains. Edward Elgar Publishing.
Satta, G. and et.al., 2020. Financial operators in port infrastructures: Typologies, objectives and
global strategies. In Geographies of Maritime Transport. Edward Elgar Publishing.
Online
Financial Objectives. 2021. [Online] Available through:
<https://www.tutor2u.net/business/reference/financial-objectives>
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