Investment Appraisal and IRR Analysis for Machine Selection

This report provides a detailed examination of investment appraisal metrics, including Net Present Value (NPV), Internal Rate of Return (IRR), Accounting Rate of Return (ARR), and payback period, to evaluate and recommend the optimal machine selection between options A20 and B25. The analysis considers the Director of Finance's claim regarding the IRR and offers explanations based on NPV and shareholder perspectives. Calculations for NPV and payback period are presented, demonstrating that while Project A has a shorter payback period, Project B exhibits a higher NPV, making it the more advantageous investment. The report concludes that investment appraisal methodologies are crucial for assessing project efficacy and guiding investment decisions, ultimately recommending option B25 based on its superior NPV and ARR.

Accountancy

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Examination of investment appraisal metrics, as well as recommendations for machine
selection..................................................................................................................................3
2. Causes and explanations for the Director of Finance's claim that perhaps the IRR is greater
than 7%...................................................................................................................................4
Calculation of Net Present Value and Payback Period for a business...................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Various methodologies are used in financial management to assess the project's economic
feasibility for the commercial enterprise. These strategies assist the corporation in determining
which project is useful to them, providing the entity with a bundle of velocity and resilience to
offer them a competitive advantage over their competitors (Burton and Bryan, 2019). These
strategies have been highlighted in this section, as well as their impact on the machine. That
outcome provides insight into the machine selection process, as well as appropriate
recommendations for the same.
MAIN BODY
1. Examination of investment appraisal metrics, as well as recommendations for machine
selection.
The investment appraisal techniques consist of various methods such NPV, ARR, IRR,
payback which are too considered for examining and giving the suggestions. By employing these
strategies in a methodical manner, they will have a knowledge to the company's operation on
project selection. These procedures are not only compliant with the requirements, but they are
also practical to apply to the data given. The best approach among them is NPV, which takes into
account the time value of cash and provides an accurate result for project selection.
 Payback Period: The starting time consumed by the intended project has been computed
using this method, giving an estimate of how long it will take to repay the project cost.
 Accounting Rate of Return: This strategy emphasises the organization's return on
investment for a specific project. The yield is calculated by means in order to come at
ARR on relative basis.
 Internal Rate of Return: A rate at which the expected profit equals the estimated cash
outflows is calculated using this method. The NPV will indeed be zero at this rate.
 NPV: It considers the time value of money, this strategy is widespread and among the
best.
 Discounted Payback: This is identical to payback time, with the exception that
discounted cash flows were used instead of future revenues to offer a more precise
conclusion (Babich and Birge, 2020).

 Profitability Index: This approach is related with net present value, with the exception
that if the PI is greater than 1, the project will be approved; otherwise, it will not.
Recommendation for project selection based on investment strategies:
Options A20 and B25 require a separate initial outlay of £ 1000000 and £ 1300000,
accordingly. Their results, however, varied depending on the methodologies used. As a result,
they are analysed using the procedures that have been provided.
 ARR: Project A20 has a 13 % of ARR, but project B25 has a 15 % ARR, implying that
B25 is the preferable alternative. Returns, however, are not the only factor taken into
account when choosing a project because risk is indeed a factor. As a result, the ARR
results are ignored when choosing a project.
 Payback Period: This strategy is thought to be preferable because it clearly demonstrates
how long the project will take to recoup its initial investment. In this scenario, A20 has a
payback of 3.67 years, which is shorter than B25's of 4.17 years. This essentially means
that A20 was chosen because it will return the investor's original cost at a fast pace,
allowing them to reap profits (Zimmermann, 2019).
 Net Present Value: This approach is extensively employed by businesses since the results
acquired are reliable because they take into account the time aspect. The NPV of A20 is
£105700, whilst of those other is £112400, implying hence B25 must be chosen by the
entity as the most advantageous option. Nevertheless, if compared to the payback term, it
is likewise not recommended.
 IRR: It is the rate during which outflow and inflow become indifferent, or when the
project's net present value is 0. That proposal with a lower IRR should be considered
since it indicates that the enterprise will produce more revenues or even at a faster rate
after attaining the IRR.
The institution's major summary after utilizing all above approaches would be that
Alternative B25 should be chosen since it delivers a prorated refund by using the NPV (Fang,
Jacobsen and Qin, 2018). Additionally, their ARR is 15%, which is higher than the average of
13%. After weighing the pros and cons of both methods, the B25 option is likely to be the better
choice.

2. Causes and explanations for the Director of Finance's claim that perhaps the IRR is greater
than 7%.
Both choices A20 and B25 have a positive Net Present Value, indicating that they are favourable
to the firm. Increased IRR indicates that the projects will benefit the organisation because they
are higher than the level set by the director, which is 7%. The director bases his estimate on the
fact that the IRR and NPV are achievable both under machine selection alternatives. The
increased IRR could be due to the fact that now the NPV is better than the director believes.
Because the IRR differs from the cost of equity, a higher IRR indicates that the project will be
profitable in the long run. In addition, the IRR is computed from the perspective of the
shareholders, and the cost is determined by the organisation (Soka, 2020).
Calculation of Net Present Value and Payback Period for a business
Payback Period:
Year
Project A
Cash flow (CF) in £ Cumulative CF in £
1 72,000 72000
2 78,000 150000
3 82,000 232000
4 110,000 342000
5 125,000 467000
Project A = 2 + 8000/82000
Payback Period = 2.09 years
Year Project B – Non- Diary milk product
Cash Flow (CF) in £ Cumulative Cash Flow in £
1 71,000 71000
2 73,000 144000
3 97,000 241000
4 118,000 360000
5 121,000 481000

Project B- = 2 + 11000/97000
Payback Period = 2.114 years
As seen in the preceding assessment, Project B has a greater payback than the A venture. It
means that if the company invests in a Project B project, it will most likely repay its initial
investment. As a result, the firm cannot participate in Project B because of the payback duration.
Net Present Value:
Year Project A
Cash flow (£) Discount factor
@15%
PV (£)
1 72,000 0.8696 62611.2
2 78,000 0.7561 58975.8
3 82,000 0.6575 53915
4 110,000 0.5718 62898
5 125,000 0.4972 62150
Total 300550
Year Project B
Cash flow (£) Discount factor
@15%
PV (£)
1 71,000 0.8696 61670.6
2 73,000 0.7561 55195.3
3 97,000 0.6575 63777.5
4 118,000 0.5718 67472.4
5 121,000 0.4972 60161.2
Total 308277

The B endeavour has a higher NPV than the A enterprise, according to the calculations above.
The cooperative venture selection process dictates that the initiative with the highest NPV be
picked. The B industry is eligible for funding as a result of the NPV.
In both investment expenditure approaches; the B business beats the A venture when comparing
Payback and NPV statistics. The investment has a shorter repayment period and a higher NPV
when using the payback method. As a result, the company will have to consider investing in B
enterprise.
CONCLUSION
The inference that can be derived from the foregoing study is that investment assessment
methodologies are critical for evaluating the efficacy and quality of the process in discussion.
Various assessment methodologies have been used in this study to assess the viability of the
project under discussion. Through this, a remark has been made, detailing the equipment
selection as well as the grounds for it. Finally, arguments and explanations have been provided
about why the financial officer claims that the Internal rate of return is greater over 7%.

REFERENCES
Books and Journals
Burton, R.O. and Bryan, W.B., 2019, September. Intensive Beef Production in the Humid
Tropics: An Evaluation of Technical and Economic Feasibility. In Proceedings of the
XIV International Grassland Congress (pp. 741-743). CRC Press.
Babich, V. and Birge, J.R., 2020. Foundations and trends at the interface of finance, operations,
and risk management. Operations, and Risk Management (December 28, 2020).
Zimmermann, K., 2019. Monetary Policy and Bank Profitability, 1870–2015. Available at SSRN
3322331.
Fang, J., Jacobsen, B. and Qin, Y., 2018. Practical Applications Report Popularity versus
Profitability: Evidence from Bollinger Bands. Practical Applications, 5(4), pp.1-4.
Soka, I.M., 2020. Impact of Appraisal Techniques on Investment Returns A Survey of
Institutional Investors (Doctoral dissertation, The Open University of Tanzania).