Investment Appraisal Techniques: Risk Assessment and CAPM Analysis

This report provides a comprehensive analysis of investment appraisal techniques, focusing on risk assessment and the Capital Asset Pricing Model (CAPM). It includes calculations of Net Present Value (NPV) for a project, determining its potential profitability by discounting future cash inflows. Furthermore, the report calculates the Internal Rate of Return (IRR) for three different projects to identify the most lucrative investment opportunity, while also discussing the advantages and disadvantages of using the IRR method. Finally, the report delves into risk analysis by calculating systematic, non-systematic, and total risk for two companies, using market returns and share prices to assess their investment viability. The report concludes with a recommendation based on the IRR analysis and emphasizes the importance of investment appraisal techniques in making informed financial decisions.

Retake Investment
Appraisal Techniques
Risk and the CAPM

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Explain risk and issues related to real investment project. Calculate Net present value and
evaluate the projects....................................................................................................................3
2. Calculate Internal rate of return of the three project and recommend the best project among
the three projects. Also state the merits and demerits of IRR.....................................................4
3. Calculate Systematic risk, non- systematic risk and total risk of the mentioned companies.. 8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Net present value is the value of future inflows in terms of present value which is calculated by
multiplying it with the discounting factor (Balasubramaniam and Easwaran, 2019). This report
includes calculations of Net present value of the project in terms of present value. In the second
section, IRR of three projects is calculated which determine the returns earned company during
the life cycle of the project. In the third section, systemic, non- systematic and total risk is
calculated which is determined to know the beta and return derived from the share price of the
companies and market return.
MAIN BODY
1. Explain risk and issues related to real investment project. Calculate Net present value and
evaluate the projects.
Year 1
Sales
(units) Probability
Expected
sales
450000 0.2 90000
35000 0.3 10500
200000 0.3 60000
90000 0.2 18000
Total
Expected
Sales 178500
Year 2
Sales
(units) Probability
350000 0.3 105000
300000 0.3 90000
100000 0.2 20000
90000 0.2 18000
Total
Expected
Sales 233000

1 Year 2 Year
Sales 1071000 1398000
Less: Variable
Cost 446250 582500
Contribution 624750 815500
Less: Fixed Cost 40000 40000
EBIT 584750 775500
Less: Interest 15000 15000
Earnings After Tax 569750 760500
Years Net Cash
Inflows Discounting @ 8% PV of Cash Inflows
1 569750 0.943 537274.25
2 760500 0.89 676845
2 (SV) 50000 0.84 42000
PV of Cash Inflow (A) 1256119.25
PV of Cash Outflow
(B) 450000
Net Present Value (A-
B) 806119.25
From the above calculated NPV it can be the project provides positive returns which can
be determined by multiplying the expected sales with the discounting factor of the company.
Risk of investing in the project is positive as the amount recover from the project is
greater than the amount invested in the project. The company should exercise the project as the
inflows from the project is positive thus company needs to access the project (Espinoza and
et.al., 2020).
2. Calculate Internal rate of return of the three project and recommend the best project among the
three projects. Also state the merits and demerits of IRR.
Project A
Years Net Cash
Inflows
Discounting Factor
@ 12% PV of Cash Inflows
1 12 0.893 10.716

2 8 0.797 6.376
3 5 0.712 3.56
4 5 0.636 3.18
PV of Cash Inflow (A) 23.832
PV of Cash Outflow
(B) 22
Net Present Value (A-
B) 1.832
Years Net Cash
Inflows
Discounting Factor
@ 10% PV of Cash Inflows
1 14 0.909 12.726
2 15 0.826 12.39
3 10 0.751 7.51
4 8 0.683 5.464
PV of Cash Inflow (A) 38.09
PV of Cash Outflow
(B) 22
Net Present Value (A-
B) 16.09
IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
Project A = 10 % + 16.09 / (16.09 - 1.83) * (12 - 10)
= 10% + (16.09 / 14.26) * 2
= 10% + 1.13 * 2
= 10% + 2.26
= 12.26 %
Project B
Years Net Cash
Inflows
Discounting
Factor @ 12%
PV of Cash
Inflows
1 12 0.893 10.716
2 10 0.797 7.97
3 8 0.712 5.696
4 5 0.636 3.18
PV of Cash Inflow (A) 27.562

PV of Cash Outflow (B) 27
Net Present Value (A-B) 0.562
Years Net Cash
Inflows
Discounting Factor
@ 10% PV of Cash Inflows
1 12 0.909 10.908
2 10 0.826 8.26
3 8 0.751 6.008
4 5 0.683 3.415
PV of Cash Inflow (A) 28.591
PV of Cash Outflow
(B) 22
Net Present Value (A-
B) 6.591
IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
Project A = 10 % + 6.591 / (6.591 - 0.562) * (12 - 10)
= 10% + (6.591 / 6.591) * 2
= 10% + 6.029 * 2
= 10% + 12.06
= 22.06 %
Project C
Years Net Cash
Inflows
Discounting Factor
@ 12% PV of Cash Inflows
1 14 0.893 12.502
2 15 0.797 11.955
3 10 0.712 7.12
4 8 0.636 5.088
PV of Cash Inflow (A) 36.665
PV of Cash Outflow
(B) 22
Net Present Value (A-
B) 14.665

Years Net Cash
Inflows
Discounting Factor
@ 10% PV of Cash Inflows
1 14 0.909 12.726
2 15 0.826 12.39
3 10 0.751 7.51
4 8 0.683 5.464
PV of Cash Inflow (A) 38.09
PV of Cash Outflow
(B) 22
Net Present Value (A-
B) 16.09
IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
Project A = 10 % + 16.09 / (16.09 – 14.67) * (12 - 10)
= 10% + (16.09 / 1.42) * 2
= 10% + 11.33 * 2
= 10% + 22.33
= 32.33 %
Recommendation: From the above calculated IRR it can be concluded that the Project C should
be selected as it provides maximum return from the project. Other two projects also provide
positive returns but the overall return as compared to the investment made is low.
Merits and Demerits of IRR.
Advantages:
 Internal rate of return is very easy to measure.
 Company can evaluate profitability of a project over whole life of project.
 If preset cost of capital is difficult then internal rate of return help to evaluate.
Disadvantages of internal rate of return:
 This method has slow process of measuring.
 This method only gives priorities to the profits, it can not cover earliest capital expenses.
 By the time of calculating internal rate of return size and scope of projects are ignored.

3. Calculate Systematic risk, non- systematic risk and total risk of the mentioned companies.
a) Calculated in Excel attached.
b) Market returns is compared with the return of the company.
In case of Centrica plc, the return of the company is lower than the market return which
can be seen from the share price of the company and market overall growth over the
period of time. In national express group plc. It also states that the return of the company
is positive but the market return are more than the companies return.
c) If the market is in equilibrium, then the demand and supply of the project is equal to each
other. The expected equilibrium rate for the both the project would be different as in case
of Centrica Plc the company’s beta is positive and in case of National Express group Plc
the company’s beta is positive which states that the company is earning a significant
amount of profit (Fraunholz, Keles and Fichtner, 2019).
CONCLUSION
From above explanation of this report, it has been concluded that techniques of
investment appraisal provide assistance a rationale as well as justification to an organisation in
order to spend invest limited resources. Such types techniques of investment appraisal helps in
making decisions that are concerned with the investment. Within this report, there have been an
explanation on the issues as well as the risks that are in relation with the project of the real
investment. Along with it, there have been calculation of the NPV as well as evaluation of the
project. Moreover, recommendations have also been given to the organisation in respect to the
decisions of the investment within the business.

REFERENCES
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Fraunholz, C., Keles, D. and Fichtner, W., 2019, September. Agent-based generation and storage
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Digitalization (pp. 855-863). Springer, Cham.
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