Investment Appraisal Techniques: A Case Study of Victoria Babies Ltd

This report provides a comprehensive analysis of investment appraisal techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR). It discusses the advantages and disadvantages of each technique, highlighting their importance in making informed investment decisions. The report applies these techniques to a case study of Victoria Babies Ltd, which is considering various expansion options. Through detailed calculations and findings, the report recommends the most suitable investment option based on the appraisal results, emphasizing the significance of positive NPV and higher IRR for maximizing profitability and shareholder value. The analysis incorporates discounted cash flow methods and considers the time value of money to provide a robust evaluation of potential investment projects.

MFR

INTRODUCTION
Importance of investment appraisal
• Feasibility
• Decision-making

Cont.
Yield better results

Appraisal techniques
• Investment appraisal techniques play vital role in the company
to make better decisions related to investment.
• Victoria Babies Ltd is planning for expansion in varied
aspects.
• It is essential for taking decision with the help of appraisal
techniques.
• These include IRR (Internal Rate of Return), NPV (Net
Present Value), Payback period and ARR (Accounting Rate of
Return). These all techniques are discussed below-

Cont.
• Payback period
• It shows recovery period of invested project.

Cont.
• Advantages
• The main advantage of payback period is that it
evaluates risk associated with the project.
• Moreover, it provides clarity about when investment
will yield desired returns.
• Another advantage of this method is that it is simple
to calculate and provide better results by utilising
time factor.
• It is focused on risk factor of the project so that
adequate returns can be generated with much ease.

Cont.
• Disadvantages
• There are shortcomings as well of this method.
• It ignores cash flows which occurs after computation of
payback period. Furthermore, another drawback of such
method is that it ignores time value of money.
• This is required to assess project and generate good results.
Moreover, it leads to poor investment decisions. Another
disadvantage is that it does not consider profitability of the
project which leads to wrong results.
• It does not take into account subsequent investments which is
considered the biggest limitation of the method

Cont.
• NPV
• NPV is useful as it evaluates project on the basis of
profitability aspect.

Cont.
• Advantages
• The advantage of NPV is that it takes into account
time value of money.
• It aids in making effective decision as it rejects
project having less NPV.
• NPV aids in maximising organisation's value as
higher NPV of project maximises organisation's
worth.
• It takes into account all the cash flows over a life of
the project.

Cont.
• Disadvantages
• It is not suitable for the company as it is purely based
on discounting rate.
• This inculcates complexity which is the biggest
limitation of using NPV.
• NPV is merely based on forecasting and this leads to
incomplete information and as such, wrong decisions
are made.
• Another disadvantage of this method is that relying
on discounting rate may result into forego of better
investment projects.

Cont.
• ARR
• ARR is a capital investment technique which
provides clarity about return on investment
made by the company.

Cont.
• Advantages
• It is simple to calculate and interpret outcome drawn while assessing
project.
• Project's viability can be easily attained in quick manner and with less
time.
• It provides clarity about effectiveness of project in less time which saves
valuable time for management.
• Accounting profit is taken with reference to IRR.
• This eases evaluating profitability aspect of new project and aids in making
viable decisions.
• It is useful for investing in short-term projects which lapses within short
time frame