Comprehensive Report on Investment Appraisal and Valuation Methods

This report provides a detailed analysis of investment appraisal techniques, including payback period, average rate of return (ARR), net present value (NPV), and internal rate of return (IRR), along with their respective advantages and disadvantages. It assesses the economic feasibility of a project involving the purchase of new storage machinery, commenting on the directors' decisions regarding equity repurchase and dividend payouts. Furthermore, the report computes various valuation methods such as the price-earnings ratio, discusses the challenges associated with these techniques, and offers recommendations for Kings Plc's board members. The analysis aims to provide a comprehensive understanding of financial management principles and their practical application in investment decisions and business valuation, highlighting the importance of accurate financial planning and risk assessment in achieving optimal returns on investment. Desklib offers additional resources for students seeking support in their studies.

MANAGEMENT

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK...............................................................................................................................................3
1. Investment Appraisal Technique ............................................................................................3
(a). Calculate Various methods of investment appraisal techniques. Also state the economic
feasibility of the project..............................................................................................................3
(b). Comment on the directors decision and evalute effects of proposal on the company..........6
(c). Explain the advantages and disadvantages of investment appraisal techniques- ................6
3. Takeovers and mergers ..........................................................................................................8
(a). Compute various valuation methods....................................................................................8
(b) Critically converse above the challenges that bare associated with the valuation techniques
used above. Also recommend that what are the techniques that could be recommended to the
board member of Kings Plc. .....................................................................................................11
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial management is known for planning, controlling, organizing the financial
activities so that there is regular and adequate flow of funds to carry out smooth business
operations. Financial management is done by three segments, they are investment decisions,
financial decisions and dividend decisions (Yusoff, 2019). Capital Budgeting is the financial tool
to evaluate the investments and expenses so that the best returns on investment can be attained.
This technique is used by the business management in order to plan the investments on fixed
assets, with the help of this it can be determined whether the projects shall be accepted or not.
The following report consists of the techniques of capital budgeting and their calculations and
the impact of proposal on the business firm. With this, it also comprises the advantages and
disadvantages of investment appraisal techniques. Moreover, it also provides with the ratio
evaluation and the difficulties linked with the valuation methods.
TASK
1. Investment Appraisal Technique
(a). Calculate Various methods of investment appraisal techniques. Also state the economic
feasibility of the project.
Payback Period: This method ascertains time period in which an organisation recover its
initial outlay. It is the time taken to reach break even point. It does not lay any attention on the
overall inflows received during the life cycle of the project (Wicaksono, Laurens and Novianti,
2018).
Year Annual Cash
Inflow
Annual Cash
Outflow
Annual Net Cash
flows
Cumulative
Cash
Inflows
0 -588.5 -588.5 0
1 233.7 33.2 200.5 200.5
2 233.7 33.2 200.5 401
3 233.7 33.2 200.5 601.5
4 233.7 33.2 200.5 802
5 233.7 33.2 200.5 1002.5
6 233.7 33.2 200.5 1203
7 233.7 33.2 200.5 1403.5

7 SV 76.505 - 76.505 1480.005
Total 1635.9 -356.1 891.505 1480.005
Payback Period = Number of complete years + (Cash outflow – total inflow till date) /
Cumulative cash inflow
= 2 + (588.5-401) /601.5
= 2 + 0.312
= 2.312 Years
Average Rate of Return:- This method ascertains the average amount of cash flow generated
during a year. This rate is calculated by average annual cash inflows divided by total number
of year the project lasts.
ARR = Annual Average Profits / Cost of Investments * 100
= (127.36 / 588.5) * 100
= 21.64%
Where, Annual Average Profits = 1480.005/7
= 121.36
Net Present value:- This methods helps in determining the amount of cash a company will
receive at the end of the project in terms of present value. Present value is the value of future
cash inflows in terms of present value of those future cash inflows (Al Nuaimi and
Nobanee, 2019).
Years
Net
Cash
Inflows
Discounting @ 9% PV of Cash Inflows
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
PV of Cash Inflow (A) 1175.9784
PV of Cash Outflow (B) 588.5
Net Present Value (A-B) 587.4784

Internal Rate of Return: This technique is used to to determine the profitability of the investment
made in the project. It is also known as discounting rate which brings the value to zero by
using net present value which is also known as discounted cash flow method.
Years
Cash
inflows
Discounting Factor
9%
PV value of cash
inflow
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
Total Cash inflow 1175.9784
Total Cash outflow 588.5
NPV (A-B) 587.4784
Years
Cash
inflows
Discounting Factor
20%
PV value of cash
inflow
1 233.7 0.833 194.6721
2 233.7 0.694 162.1878
3 233.7 0.579 135.3123
4 233.7 0.482 112.6434
5 233.7 0.402 93.9474
6 233.7 0.335 78.2895
7 233.7 0.279 65.2023
Total Cash inflow 842.2548
Total Cash outflow 588.5
NPV (A-B) 253.7548
IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
= 9% + (587.48 / 587.48 - 253.75) * (20 – 9)
= 9% + (587.48 / 333.73) * 11
= 9% + (1.76) * 11
= 9% + 19.36
= 28.36%
Feasibility: The organisation may exercise this project of purchasing new storage machinery
for the organisation. The initial outlay for the machine will be 588.5 which can be recovered
by the company over the period of 2.3 years. If it is compared with the total value the which

the organisation will be able to generate during the life cycle of the business will be 842.25.
The net amount in terms of today if the concern invest in the project then it will receive
253.75 at the end of the project. The NPV of the project is positive which states that the
business concern may buy this new machinery for the expanding their business operations.
This project shows a positive NPV which means that after the completion of the project the
firm will earn a fair amount of return from the project. The decision of making a new
purchase of machinery is relevant and company can proceed with this decision of making
purchase of new machinery (Yusufov and et.al., 2019).
(b). Comment on the directors decision and evalute effects of proposal on the company.
The decision of the finance director of choosing 50% of the inflow of the project is used in
repurchasing the equity capital and rest of the amount will be used to pay cash dividends to
the existing equity shareholders. The organisation realised by the organisation will be used
to increase promoters shareholding in the company which will help in reducing the existing
liabilities of the company. Buy back of equity shares is supported by some set of rules
prescribed in law.
Cash dividends are paid to the investors for the investment made by them in the organisation.
Investors do expect dividends in return of their investment made in the organisation.
Great ideas are supported by big business opportunities, it is the next new that the consumers can
get the new in the market that will solve their future problems of the business. The
business is evaluated by using the different methods of Investment appraisal techniques.
The organisation can opt for net present value which depicts the accurate value in terms of
today that the organisation will receive after specific period of time (Rodriguez, 2020) .
(c). Explain the advantages and disadvantages of investment appraisal techniques-
Payback period- It is the tool which is used to calculate the time taken to recover the cost of
investment. If the payback period is shorter then it means that the investments are attractive.
The advantages of payback period are as follows-
It is beneficial for those business enterprise which tend to make investments in small amount.
Payback period does not involve in the more tough evaluations i.e. they do not take other
complex factors into consideration. It is also simple in nature because it is very easy to
understand and calculate.

This method of investment appraisal technique focuses on how fast the money can be returned
from the investments that a company makes. This interpretation assists in calculating the
measure of the risk with respect to the project on which the company is going to make an
investment.
This metric favours the project that returns money to the firm in short time. Thus it can be said
that this technique of capital budgeting is focused on the liquidity (Chia-Cheng, Liu and
Hsu, 2019).
This method helps the company by protecting against the risk factors associated with long-term
investment.
Disadvantages of Payback Period-
The payback period is only concerned with that cash flow amount that is only covered with the
time till the initial investment is recouped. It does not consider the cash flows that occurs in
the upcoming years.
The firm cannot rely on this method as it does not cover the other scenarios like discount rates
and other factors.
It does not deliver guarantee that even if the payback period is short the business will earn profit.
Internal Rate of Return- This metric helps the company in assessing that which project is worth
for the investment purpose. This tool estimates the profitability associated with the particular
project. The IRR can be beneficial because-
As it is calculated by evaluating the interests rates at which the present value of future cash flows
equals the capital investment required. So, the subsequent cash flows are also considered.
It is simple means to assess the worthiness of various projects. It portrays that what investment
projects will give the highest capability cash flow.
The IRR technique does not require the hurdle rate which makes it easy for the company to
select the project that gives the return more than the cost of capital.
Drawbacks of IRR-
Another disadvantage of using this tool is that it does not report for the size of the project when
any investment is compared.
It ignores the the future cost that will be incurred during the life of the project. It also does not
account for the potential cost of the project. Various costs such as variable, fuel and

maintenance cost incurred in the project. The opportunity cost of not reinvesting the amount
will shows a loss of income for the management (Gray, 2019).
Although it considers upcoming cash flows, but it makes an assumption that the future cash
flows can be invested again just as the equal rate as the IRR.
Net Present Value- It is an accounting measure which is the difference between the present value
of future cash inflows and present value of the future outflows over the period of time. The
benefits of the NPV can be as follows-
This helps the company by telling that the investment it is making would be beneficial for the
business or not.
It considers the cost of capital and the risk fundamentals in future projections.
Disadvantages Of net present value method are noted below-
 It guesses the future cash flows which is the major problem as it can result in suboptimal
investments.
 This method cannot be applied to those projects that have differentiated investment
amounts.
 It is very difficult to apply this approach when the projects are compared and each of
them has variances in their life spans.
3. Takeovers and mergers
(a). Compute various valuation methods.
Price Earning Ratio- It is the measurement of the amount of money that an investor is
willing to pay for the each dollar of the firm's profit. It is also helpful in the determination of the
stock in terms of expensiveness and inexpensiveness. The price earning ratio can be determined
by dividing stock price with earnings per share. If this ratio is high then it signifies two things i.e.
either the price of stock is over valued or the company has rapid growth. But if the ratio is low
then it means the under valuation of stock price or the company is in the mature industry
(Ayodele, Oladokun and Kajimo-Shakantu, 2020). Investors make use of such ratio to make the
comparison between the value of stocks. This ratio has huge significance in the stock market and
also for the financial institutions like banking and insurance companies. It gives the accurate
information to evaluate the undervalued stocks on which the business enterprise can rely. In
other words it is the earning per share that the company net income would determine. It is the
income that will be earned by the organisation, it is the same as any investor will receive whom

have purchased the share of the organisation. Increase in the price of stock increases the wealth
of the investors, which will also increase the wealth of the business concern.
Investors can use this ratio to ascertain the stock value in the market and it also helps in
determining the future value and growth of the stock in the recent time. The prices to be higher
of the stocks whose prices are regularly increased. The price of the stock is also determined in
the market by the demand and supply in the market. This ratio analysis tool aids in measuring the
future circumstances by comparing present performance with the past one. This does not cover
the debt structure while computing the financial reports (Sadly and et.al., 2018). Price earning
ratio is a great benchmarking tool for evaluation of stock as it helps in quick decision-making.
The formula for the above is = Market share price / Earnings per share
= 4.25 / 0.31
= 13.71
Value of the firm Dragon Plc which could be computed by using the P/E ratio of the Kings Plc is
below:
= Earnings per share of Dragon Plc * P/E of Kings plc
= (40.4 / 210) * 13.71
= 0.19 * 13.71
= 2.605
Discounted Cash flows- It is the valuation technique which is used to measure the value
of an investment on its expected future cash flows. It provides an assistance on valuing a
security, project, company, asset by using time value of money concept. It has its wide usage in
corporate financial management, patent valuation, investment finance and real state
development. This method can be applied by estimating all the future cash flows and discounted
rates using the cost of capital to get the present values. The positive discounted cash flow depicts
that the positive returns will be derived from the investment. Firms mainly use weighted average
method to value the stocks as it considers the values of past and previous values. It also considers
the rate of return earned by the shareholders (Dean and Hickman, 2018).
The cash flow is the addition of both the inflows and outflows is the NPV which is
covered as the value of cash flows. This tool uses particular figures that involves important
presupposition about the company, including cash flow projections, rate of growth, and other
factors that arrive at a value. It is more objective than the other measurement tools.

Annual After tax synergy / Cost of Capital
= 5.36 / 11% = 48.73
Dividend Valuation method- This method is used according to the size and type of the
organisation. It is one the method which is used to measure the value of the stock. This method
uses share growth and dividend received at the end of the year. It is basically used for the
valuation of blue chipped companies. It can be valued by using 2 methods which are mentioned
below,
1. Stock value = Dividend value per share / (Required rate of return – Dividend growth rate)
2. Rate of return = (Dividend payment / stock price) + Dividend growth rate
Po = D1 / (Ke – G)
= 12p / (6.13% - 2.5%)
= 12p / 3.6%
= 333.33 p or £ 3.33
Valuation of Dragon Plc
= Number of Equity Shares * the current market price per share
= 210 * 3.33
= £ 699.33.
Here,
Po - Current Market Price per share
Ke - Cost of Equity
D1 - Expected dividend per share
G - Growth rate
Working Notes:
 Cost of Equity:
CAPM = Rf + B (Rm – Rf)
= 5.5 + 1.05 * (11% - 5.5%)
= 5.5 % = 1.05 * (5.5%)
= 5.55 + 0.58
= 6.13 %

 Calculation of Expected Dividend per share:
D1 = Dividend Paid (Do) + Growth Rate (G)
= 12p + 2.5
= 12.3 p
(b) Critically converse above the challenges that bare associated with the valuation techniques
used above. Also recommend that what are the techniques that could be recommended to
the board member of Kings Plc.
In the following case the organisation can opt for Discounted cash flow method. This method
present the fair value of the firm because it considers the time value of money. The assumption
in this method are more accurate as it considers discounted cash flow technique. The results
shown in this type of cash flow resembles the value which are more associated the actual values
of the organisation and is not based on the assumptions just like the other models (Oyewo, Vo
and Akinsanmi, 2021).
CONCLUSION
From the above report it can be concluded that organisation is working towards the
organisational goals which will improve the organisation's earnings and profitability. There are
various tools which can be used by the organisation to evaluate different proposal available to
the company. Some of the methods considers time value of money and other does not consider
time value of money. The project which provides highest return should be selected according to
the value derived by using the methods. Investment appraisal is an effective tool that the
organisation can access in checking the viability of the project. Value of share can be determined
by using different methods such as discounted cash flow, dividend valuation method and price
earning model. When any organisation wants to sell its share in the open market then it can use
different valuation methods that can ascertain the value of share.
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