Financial Management: Evaluating Investment Appraisal Techniques

This report delves into the core principles of financial management, focusing on investment appraisal techniques and market efficiency. It begins by critically evaluating the benefits and limitations of various investment appraisal techniques, including the Payback Period, Accounting Rate of Return, and Net Present Value. The analysis provides a detailed understanding of how each technique functions and its implications for financial decision-making. The report further explores market efficiency, examining its three forms: weak, semi-strong, and strong. Each form is critically evaluated, providing insights into how market information affects asset pricing and trading strategies. The report incorporates relevant academic evidence to support its claims, offering a comprehensive overview of the subject matter.

Financial management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Critically evaluate the benefits and limitations of each of the different investment appraisal
techniques...............................................................................................................................3
2.Determine market efficiency using three different strength................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In the below report, the process of financial management is determined with the help of
planning, organizing, controlling and directing. Financial management includes investment
appraisal techniques which are used in future decision making (Zaimi., 2020) . The techniques
include payback period, Net present value and Accounting Rate of Return which is explained
below including evaluation. In this following report, market efficiency is also described using
three different strengths; weak form, semi-strong form, and strong form. These market
efficiencies are also critically evaluated in the following report.
MAIN BODY
1. Critically evaluate the benefits and limitations of each of the different investment appraisal
techniques
Investment Appraisal Techniques:
Investment techniques are a combination of methods used to determine future profits and losses
from investments and projects. These techniques help in choosing an investment which generates
future profits for the firm. Investment techniques are characterised by two parts, one is
discounted techniques and another is non-discounted techniques (Centobelli, Cerchione and
Ertz., 2020) . Discounted techniques include Net present value (NPV), Internal Rate of Return
(IRR) whereas non-discounted techniques include a Payback period . These techniques plays
important role in decision-making and maximise the profitability of a firm from their new
investments. It helps in reducing investment risks and maximising shareholder value . Investment
appraisal techniques help in measuring return on investment with qualitative and quantitative
information.
Evaluation of various Investment appraisal techniques are as follows:
i. The Payback Period:
The payback period refers to the time duration taken by an investment to recover
its cost. The payback period is the length of time investment needs to reach its
break-even point. Break-even is the situation of no profit and no loss. A shorter
payback period refers to a more suitable investment, while longer pay back period
refers to less desirable investment. Finance manager uses payback period to

calculate weather to go with the investment or not . Payback period is calculated
by dividing total amount of investment by the annual cash flow.
Advantages of Payback period:
 Simple procedures: Simplicity of payback period is a major advantage. Company can
make decision on how efficiently an investment is going to payback its cost which is only
done through foretasted cash flow. It can be apply on different project which have same
cost of amount. When a manager engaged in a project analysis, payback period can be
calculated without help of any calculator or electronic spread sheet. (Chebotarova,
Perekrest and Ogar., 2019).
 Helpful for small businesses: Small business does not have enough funds to invest in
multiple projects. This method helps small business to invest their limited funds more
carefully. This technique is a great manner to well decide what project is going to pay-
out. This analysis tells favourable project for the business in terms of return on
investments. The results of payback periods depends on investment with a greater degree
of short term liquidity. This is a useful method during times when there is uncertain long
term returns on the particular investment.
Limitations of Payback period:
 Less importance to Budgets: Payback period mainly focus on the initial return of the
project, it have shorter focus on budgeting principles. It is more suitable to the firm which
is looking to invest, recover and reinvest as early they can. It is not suitable for long term
investment purpose because it has leading shortcomings (Qiu., Yu and Cai., 2021).
 Doesn't consider time value of investments: The value of money depend on the time. This
techniques mainly focus on fastest possible returns and completely ignore time value of
money. It dismiss everything after recouping investment by company.
ii. Accounting Rate of Return: It is a capital budgeting formula which is used to
measure profitability of a long term investment and accession for a business over
a period of time. This technique give a exposure of the actual earning power of a
initial investment (Yu., 2021). It can not include time value of money, which
assumes that money generated in past is more valuable then the present generated
money. It help business to select one more profitable project from other projects.
It plays a important roll in decision making and planning process.

Advantages of Accounting rate of return:
 Simplicity: It is a easy technique which used to measure quick returns from an
investment. It help in tracking and measuring current position of the company. It is
simple to measure and understand the payback pattern over the economic life cycle of the
project.
 Help in decision making: This method is mainly used by short time investors for
appraising their investment finance decision. This method allow the comparison of
different investments of competitive nature. It is helpful in comparison of two and more
projects.
Disadvantages of Accounting rate of return:
Time value of money: This technique is not usable where investment is made at different time or
in parts. This method not includes cash inflows, taxes etc, it only consider accounting profits. It
ignore time value of money. Time value of money is an important aspect in selecting the
visibility of investment .
 Exclude external factors: This technique ignore the external factors and also give
different results if same project is analysed by the return on investment method. This
method is not suitable for long term projects or investments.
iii. Net Present Value: It is the difference between cash inflow and outflows over a
period of time.. It is used in investment planning and capital budgeting to measure
profit percentage of a initial project or investment. It help in balancing the current
value of future cash flows yield by a investment. It is used to analysed how much
an investments cash flow is valuable for the organization. Main reason behind
calculation of net present value is to modify risk of an investment opportunity
and to involve the time value of money.
Advantage of net present value :
 Time value for money: This method give importance to time value of money while
measuring difference between cash inflows and outflows (Skirbekk., 2022).
 Decision making: This method helps in decision making process for organisations. It help
in evaluating project of different sizes and also help in identifying whether a initial
project is profitable or not.
Disadvantages of net present value:

No set guidelines for calculations: Whole calculation of NPV based on discounting values of
cash flows to its current value using the required rate of return (Chisalita and Cormos., 2019).
There is no specific guidelines to determine such rate .
 Can not used to compare different size project: It can not be used to compare project of
different sizes. NPV of a larger project is higher than the smaller project.
2. Determine market efficiency using three different strength
Market efficiency: The degree known for the accurate and relevant share price in the marketplace
is termed marker efficiency (Landi and Sciarelli., 2018). This market states that if the market is
efficient then the whole information which is related to the market is already included in the
price. It creates a strong market that is not defeated by anyone because it does not consist of any
type of undervalued and overvalued securities. The market can contain sufficient information
that helps in maximizing the opportunity of buyers and sellers of securities to affect the activity
besides increasing the cost of the transaction. Market efficiency is classified into three degrees;
weak form, semi-strong form, and strong form which described are as follows:
Weak Form: It states that the share price of the current time reflects the share price of the past
because if the price of the shares is not increased as per the investor or company's concern that
means it shows the weak form of that market(Ahmad, Jabeen and Wu., 2021) . This form also
claims that any past price fluctuation is not affected a share price and can't be used by future
decision-makers. It is also known as the random walk theory.
Semi–Strong Form: It is the form of efficient market Hypothesis that claims that the present
price of the share market adapts quickly to the release of whole new information to the
population. It states that both basic and technical observations are pointless in terms of analysing
the future fluctuation of share prices (Hui, Liang and Yeung., 2019). For example, if the
company shares price is $10 and suddenly the call occurs for the company shares and states that
the price of the company is now $8 due to some rules and the next day the price of the shares
gradually increases by $11 after the call. These all fluctuations of the company resulted that the
impact back of share price being positive which means an effective cost-cutting strategy is taken
place .
Strong Form: Strong form is a degree of market efficiency that claims that the price of the
market reflects the information public and private. This degree of market efficiency says that if

the profits of share are increased by normal or if the investor acquired abnormal gain have
resulted in that price as strong form. This type of abnormal gain is analysed by the investor with
the help of some research (Lin, Hsieh and Chu., 2020).
Critically evaluation of market efficiency using three different strength
Advantages Disadvantages
Weak Form It is the degree which helps in
the form of fundamentals or it
also provides information
about the price fluctuation on
behalf of the prevailing price
(Pata and Aydin., 2020).
This form considers buying or
selling on behalf of the
majority of the investor. Due
to this investors are often
affected by herd
impulsiveness. This
assumption may not be correct.
Semi–Strong Form This market efficiency
provides all information in the
public domain in the
computation of the stock's
latest price .
It is not helpful for the investor
to calculate or identify
unvalued securities (Nedelsky
and Taylor., 2019).
Strong Form It is the most rigid form of
market efficiency because it
provides information of both
whether public or private and
is accounted for in a share
price .
This degree does not provide
any sort of information to the
investors as an advantage .

CONCLUSION
From the above report, it can be concluded that the financial management analyses with
some investment appraisal techniques and market efficiency tool where investment appraisal
techniques include Net present value, Payback period and Accounting rate of return benefits and
limitations and the market efficiency describe and critically evaluate 3 elements of strength that
are weak form, semi-strong form, and strong form for decision making and future forecasting. It
provides all necessary information about the market prices of goods and services.

REFERENCES
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