Evaluating Investment Appraisal and Dividend Policy: Carport Plc Case

This project report provides a comprehensive analysis of investment appraisal techniques, including Net Present Value (NPV), Payback Period, and Accounting Rate of Return (ARR), to evaluate the feasibility of investment projects. It assesses the advantages and disadvantages of each method, offering recommendations for project selection. Furthermore, the report examines the dividend policy of Carport Plc, computing share prices under different dividend scenarios and critically assessing relevant dividend theories and their impact on market prices. The analysis incorporates financial data to provide a detailed evaluation of investment options and dividend strategies, concluding with insights into optimal decision-making in financial management. Desklib offers a wealth of similar solved assignments and resources for students.

PROJECT

Table of Contents
TASK........................................................................................................................................4
Question No. 1:........................................................................................................................4
a) Computation of Payback Period, Net present value and accounting rate of return along with
recommendation in context of selection of the project:....................................................................4
b) Advantages and disadvantages of each of the various appraisal tools and techniques..................8
Question No 3........................................................................................................................10
a) Computation of share price of Carport Plc if company does not alter its current dividend policy:10
b) Assessment of company’s share if managing director proposed dividend policy are considered
upon:................................................................................................................................................11
c) Critical assessment of distinctive models or theories which would support and against the
dividend payment made by the entity on its market price:..............................................................12
CONCLUSION.........................................................................................................................15
REFERENCES...................................................................................................................................16

INTRODUCTION
Financial management can be explained as a managerial function or activity
which has been involved or taken in account with developing plans and monitoring the firm
related monetary sources. In various phrases it involves acquiring, financing and managing
belongings for performing or carrying out the general purpose or goal of a business enterprise. In
this report the investment appraisal tools and techniques have been taken into account and
implemented in relation to choose the project plan (Abidoye and Chan, 2018). The techniques
which have been applied are such as accounting rate of return, payback period and net present
value as well. After application of all of the above stated methods the suggestions which have

been made that which method can be considered best and feasible as well for the entity along
with the choosing of the plan. Another discussion in the given statement has been carried out and
made regarding the valuation of Carport Plc by considering the existence of dividend policy of
the corporations as well. Further, the market prices and rates have been assessed and evaluated
after considering the viewpoint of management of director. In the end of report prepared theories
which are been discussed considering the effect on market rates and prices when the dividend is
being paid or not by the business enterprise.
TASK
Question No. 1:
a) Computation of Payback Period, Net present value and accounting rate of return along with
recommendation in context of selection of the project:
 Net present value: The NPV method is counted as one of the best methods in case of
investment appraisal tools and techniques and it is highly suggested as it considers the
time value of money and its worth as well (Al Nuaimi and Nobanee, 2019). The selection
of the plan and project can be made on the basis of Net present value of that project
resulting higher would be chosen as it is beneficial for the business for investing in that
plan only. The following table would further indicate the computation of Net present
value for Plan A and B with the conclusion thereof according to the selection of the same.
The formula applied for computation of NPV is as under:
Net Present Value = (Present Value of Cash Inflows – Present Value of Cash Outflows)
Project A: (Figures in £)
Years Cash flows Discount Factor @
10 %
Present Value of
Cash Inflows
1 55000 .909 49995
2 40000 .826 33040
3 25000 .751 18775
4 10000 .683 6830
4 50000 .683 34150
Total Present
Value of Cash
142790

Inflows
Less: Cash
Outflows
(190000)
Net Present Value (47210)
Project B: (Figures in £)
Years Cash flows Discount Factor @
10 %
Present Value of
Cash Inflows
1 15000 .909 13635
2 25000 .826 20650
3 45000 .751 33795
4 65000 .683 44395
4 20000 .683 13660
Total Present
Value of Cash
Inflows
126135
Less: Cash
Outflows
(170000)
Net Present Value (43865)
Recommendation:
With the help of Net present value method, it can be said and suggested that both the
projects have been observed to incur losses. The NPV has been negative for both the
project therefore the business must not be investing their sums in any of the projects.
However, when negative NPV is being chosen for carrying out comparison the Project B
is counted to be less risky as compared to Project A as its negative cash flows have been
less and lower when compared with Project A.
 Payback period: This method reflects the time which is demanded or needed by the
chosen project for recovering the initial investment which has been made by the
organisation. This method can be used for giving and ascertaining an idea as how long
time is required by the company for generating profits and revenues for its investors.

Decision making is based on the time which was taken by the project and that plan will
be chosen whose payback period would result to be lower than other.
The formula used for calculation of payback period is stated as under:
Payback period = Initial investment/ Cash flow per year
The computation of payback in respect to Project A and B are being stated as under:
Project A:
(Figures in £)
Years Cash Flows Cumulative Cash Flows
0 -190000 -190000
1 55000 -135000
2 40000 -95000
3 25000 -70000
4 10000 -60000
4 50000 -10000
The payback period in relation with the Project A has resulted to be more than 4 years,
since the initial expense is not being recovered fully at the end of 4th year also.
Project B:
(Figures in £)
Years Cash flows Discount Factor @
10 %
Present Value of
Cash Inflows
1 15000 .909 13635
2 25000 .826 20650
3 45000 .751 33795
4 65000 .683 44395
4 20000 .683 13660
Total Present Value
of Cash Inflows
126135
Less: Cash Outflows (170000)
Net Present Value (43865)

Recommendation:
On the basis of Net Present Value method, it can be asserted and concluded that both the projects
have been incurring losses. The NPV has resulted for both the projects thus the enterprise should
not be investing their sum in either of the planned project. However, when Negative NPV is
being compared, the Project B is being considered to be less risky when compared to Project A
as its negative cash flow is being observed to be lesser than Project A.
 Accounting rate of return: The ARR of an investment measures the average yearly net
financial gain of the project as a percentage of the investment being made. The numerator
is the average of annual net income which is being generated by the project plan over its
useful life cycle. The denominator can be either the initial investment being made or the
average investment over a time span of useful life span of project. Average investment
denotes the average amount of fund which remains blocked over the life time of the
project being counted under consideration. The formula of calculating ARR has been
stated as under:
Average rate of return = (Average Annual Cash Flow / Initial Investment to be made)
The ARR for the given projects are being measured below:
Project A:
Years Cash Flows
1 55000
2 40000
3 25000
4 10000
4 50000
AVERAGE CASH INFLOW (180000 / 4) 45000
INITIAL INVESTMENT 190000
ARR (45000 / 190000 * 100) 23.68 %
Project B:
Years Cash Flows
1 15000
2 25000

3 45000
4 65000
4 20000
AVERAGE CASH INFLOW (170000 / 4) 42500
INITIAL INVESTMENT 170000
ARR (42500 / 170000 * 100) 25 %
Recommendation:
On the basis of ARR computed, Project B must be counted as better because it would be
providing and rendering higher rate of return which is 25% whereas Project A is generating
23.68% return only. The variation among both the return on project observed is counted as
negligible and both the projects can thus be chosen.
b) Advantages and disadvantages of each of the various appraisal tools and techniques.
Benefits of Net present value
 NPV can be observed as the addition towards the wealth of stakeholders. The criteria of
NPV is thus in compliance with basic finance based aims and goals.
 The net present value can be observed and counted as the addition towards the wealth of
stakeholders. The criterion of NPV is hence in conformity with basic financial subjective
purposes.
 The NPV would be making best use of discounted cash flow i.e. would express cash flow
in relation with current rupees. The NPVs of various projects therefore can also be
compared easily. It implies that every project plan can be examined independent of others
on their own worthiness.
 The whole stream of cash flows in counted and considered that would make the results
even more feasible and which can be trusted for decision making process for choosing of
the plan.
 NPV method takes into consideration the time worth of money which would provide in a
more accurate form and outcomes for the business enterprise.
Limitations of Net present value

 The utilization of this acting necessitates which would be predicting cash flow and
discounting rate.
 The decision made as under the NPV method would be based on an absolute measure. It
would ignore the variation in initial outflows, size of several proposals etc while
examining mutually exclusive based projects.
 It would include complex computations which takes usually a longer time span.
Benefits of Accounting rate of return:
 This method might also be mirrored as the technique being used for evaluation of
performance on the operational outcomes of an investment being made and management-
based results as well. With the help of same procedure in both performance evaluation
and decision-making process would ensure uniformity.
 This tool uses already ready information which is generated on a routine basis for
finance-based records and reports and won't require or demand any special procedures for
generating data.
 Computation of the ARR method would be considering all net incomes over the entire
life cycle of the plan and providing a measure of the investment based net income.
Limitations of Accounting rate of return:
 Inclusion of only the book worth of the value being invested asset ignoring the fact which
a project can demand commitments of working capital and other outlays which are not
being included in the book value of the project plan.
 The method would be making best use of net income rather than the cash flow: whereas
net income is a helpful measure of profitability, the net cash flow would be a better
measure of an investment-based output or performance.
 The tool would be using accounting numbers which are dependent on the company's
choice of accounting procedures and various accounting process eg. Depreciation value
methods, can lead towards considerably various amounts for an investment net output or
income and book worth.
 The ARR tool, likewise the payback period technique would ignore the time worth of
money and would take in account the value of all cash flow to be equivalent.
Benefits of Payback period:

 It is not difficult because the strategy does not consider the time value of independent
commands.
 This is simple as it provides a quick measure of how long it will take for the association
to recoup investments
 The length of the payback period can also be used as a measure of venture capital. The
longer the payback period frame, the less secure the project, as long-term predictions are
less reliable. In certain businesses with a high risk of obsolescence, such as the
programming industry or where an association needs funding, shorter payback periods are
often the deciding factor for speculation (Bardal, 2020).
Limitations of Payback period:
 It ignores the time value of money. No matter how long the payback period of the two
activities is very similar, the payback period strategy considers them to be the same as
invested money, regardless of whether one venture generates most of the net inflow in the
early long term of the mission and the other venture capitals at the end of the payback
time frame Generates a significant portion of net inflows over a long period of time.
 A second limitation of this approach is that it cannot account for the full productivity of
speculation. It only takes into account cash inflows during the start-up's full recovery period
and ignores revenue after the compensation time frame.
 The payback period approach places a strong emphasis on short-term compensation
periods, thus ignoring long-term projects.
Question No 3
a) Computation of share price of Carport Plc if company does not alter its current dividend
policy:
If the organization does not change its present profit strategy, the dividend discount model
will be used for determining the value of the company (Dean and Hickman, 2018). Financial
model will represent future profits with limited value. Under this model, the cost of an offer to be
exchanged is determined by the PV of all normal future profit instalments, subject to an
appropriate gambling change rate. Profit Markdown Model Cost is the intrinsic value of the
stock
Intrinsic value = Sum of PV of future cash flows

Intrinsic value = Sum of PV of Dividends + PV of Stock Sale Price
The value of share price of Carport Plc is calculated as below:
Period Dividend Discount Factor @
15 %
Present Value of
Dividends
2016 27.20 .870 23.66
2017 28.60 .756 21.62
2018 30.20 .658 19.87
2019 31.60 .572 18.08
2020 33.70 .497 16.75
2021 36.0 .432 15.55
Total Present Value 115.53
The worth of the corporation share as at present point of time would be considered as 115.53
Pence with the help of dividend discount model.
b) Assessment of company’s share if managing director proposed dividend policy are considered
upon:
The value of the enterprise can be calculated with the help of Gorden growth model if the
proposal given by managing direct is considered valuable. The formula used and helpful for
calculating the same is as under:
Po = D1 / (Ke -G)
Here,
Po = Current Market price per share
D1 = Expected Dividend per share
Ke = Cost of Equity
G = Growth rate in dividends
After making best use of above stated formula the value which is being received and recorded:
D1 = 75p * 35 % = .2625p
Growth rate = 10.50%
Cost of Equity = 15 %
Therefore, Po will be

= .2625 / (15% -10.50%)
= 5.833 per share
c) Critical assessment of distinctive models or theories which would support and against the
dividend payment made by the entity on its market price:
The two kinds of dividend models or theories are being discussed as under:
MODIGLIANI and MILLER (MM) HYPOTHESIS:
Modigliani – Miller theory was proposed by Franco Modigliani and Merton Miller in 1961.
MM approach is in support of the irrelevance of dividends i.e., firm’s dividend policy has
no effect on either the price of a firm’s stock or its cost of capital.
According to MM hypothesis
Market value of equity shares of a firm depends solely on its earning power and is not
influenced by the manner in which its earnings are split between dividends and retained
earnings.
Market value of equity shares is not affected by dividend size.
Assumptions of MM Hypothesis
MM hypothesis is based on the following assumptions:
 Perfect capital markets: The firm operates in a market in which all investors are rational
and information is freely available to all.
 No taxes: There are no taxes or no tax discrimination between dividend income and capital
appreciation (capital gain). It means there is no difference in taxation of dividend income
or capital gain. This assumption is necessary for the universal applicability of the theory,
since the tax rates may be different in different countries.
 Fixed investment policy: It is necessary to assume that all investment should be financed
through equity only, since implication after using debt as a source of finance may be
difficult to understand. Further, the impact will be different in different cases.
 No floatation or transaction cost: Similarly, these costs may differ from country to country
or market to market (Doszyń, 2020).
 Risk of uncertainty does not exist: Investors are able to forecast future prices and dividend
with certainty and one discount rate is appropriate for all securities and all time periods.
The formula of calculating the value of the firm with the help of MM Approach are being
discussed below: