Search

Importance of Investment Evaluation - Expansion Group Ltd

University: UKCBC COLLEGE

  • Unit No: 2
  • Level: Undergraduate/College
  • Pages: 12 / Words 2894
  • Paper Type: Assignment
  • Course Code: JNB518
  • Downloads: 4595
Question :

Investment appraisal techniques plays an important role in assessing investment’s viability. You are asked to addressed following three questions to understand the importance of investment evaluation:

  • Explain the suitable cash flows used for the purpose of investment evaluation. 
  • Calculate the Net Present Value (NPV) for the investment proposal and advise the CFO whether this project should be undertaken. 
  • Critically evaluate the choice of funds that the CFO wishes to use against other possible options and critically discuss any other issues that are applicable in this scenario.
Answer :
Organization Selected : Expansion Group Ltd

INTRODUCTION

Investment appraisal techniques are quite crucial for assessing an investment's viability. The present report deals with Expansion Group Ltd which is planning to undertake a year project in Turkey. For evaluating the attractiveness of the project, relevant cash flows are calculated. Moreover, the CAPM technique is used to carry out the required rate of return in an effective manner. From this, NPV is calculated for making recommendations to the CFO on whether to invest in it or not.

Need Academic Writing Help?

Seek the Best Academic Writing Help in the UK

Learn More

A) Determining Cash Flows of the Project for Evaluation Purpose

Relevant cash flows calculated for Expansion Group Ltd

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Sales revenue

800000

800000

800000

800000

800000

800000

800000

Sales of products

500000

525000

527000

529000

531000

533000

535000

 

 

 

 

 

 

 

 

Total Inflows

1300000

1325000

1327000

1329000

1331000

1333000

1335000

Outflows

 

 

 

 

 

 

 

Opportunity costs

725000

725000

727000

729000

731000

733000

735000

Turkish visits costs

50000

50000

51000

52000

53000

54000

55000

total outflows

775000

775000

778000

781000

784000

787000

790000

Net cash inflows

525000

550000

549000

548000

547000

546000

545000

 

 

 

 

 

 

 

 

initial invest

500000

 

 

 

 

 

 

capital

3000000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening Balance

3500000

3500000

2950000

2401000

1853000

1306000

760000

Closing Balance

3500000

2950000

2401000

1853000

1306000

760000

215000

 

The above computation shows relevant cash flows being calculated for the company for undertaking a project for seven years in Turkey. The proposal is made whether to accept it or not in the best possible manner. It can be highlighted that the project investment cost is 35,00,000 which is bifurcated into 50,000 of set up costs of the project in the nation and the remaining is capital amounting to 30,00,000. The after-tax cash flows are even ie, they will remain the same throughout the year time spans of the project quite effectually. Furthermore, visits to the national cost is estimated to be nearly 50,000 which will increase in these years.

On the other hand, opportunity cost is identified and valued at around 725,000. This figure will also increase in future course of action. This means that after taking cash flows of 8,00,000, it is required to calculate all the relevant cash flows that will be generated by the project in seven years. It can be interpreted from the above computation that sales revenue and product sales are taken and thus, total cash inflows are computed. In relation to this, outflows are taken and net cash inflow for the project is arrived.

B) Calculation of NPV and Advising CFO for Accepting or Rejecting the Project

Computation of required rate of return (CAPM Model)

Formula

Required rate of return = Rf + β * (Rm - Rf)

Particulars

Figures

Beta

1.2

Rm

6.50%

Rf

2.00%

Required rate of return

2% + 1.2 * (6.50% - 2%) = 7.40%

 

Year

Net cash inflows

Present value factor @ 7.4%

Discounted Cash Flows (DCF)

0

3500000

 

 

1

525000

0.931098696

488826.8156

2

550000

0.866944783

476819.6304

3

549000

0.807211157

443158.9252

4

548000

0.751593256

411873.1043

5

547000

0.699807501

382794.703

6

546000

0.651589852

355768.0591

7

545000

0.606694462

330648.4816

 

 

 

2889889.719

 

 

Initial investment

3500000

 

 

NPV

-610110.2807

 The project is being assessed with the help of NPV which is a commonly used investment appraisal technique for evaluating projects in the best possible manner and making structured decisions. It can be interpreted that as per the given information required rate of return is calculated by taking the CAPM model and thus, the rate comes to 7.40%. Furthermore, net cash inflows are attained and by taking the present value factor, discounted cash flows are calculated for each of year (Investment Appraisal. 2012). The total sum arrived is 2889889.71 while the total initial investment cost is 3500000. It clearly shows that NPV is -610110.28 which is negative and it clears that Expansion Group Ltd should not invest in the Turkey project as NPV is not in positive form. Adequate returns will not be generated, hence, it is advised not to invest in this project.

C) Critical Evaluation of Choices of Funds and Relevant Issues in the Project

There are sources of funds that can be used by the CFO of the company are listed below-

Bank Loans

It is one of the commonly used methods by companies as it helps to take money for investment purposes and also to take for meeting out operational expenses. The principal amount is to be paid along with interest on it in installments (Subramanian and Ramanathan, 2012).

Advantages

  • Easy to take a loan and the simplest procedure
  • The interest rate is fixed and easy to calculate installment amount

Disadvantages

  • Interest is to be paid which limits the use.
  • Debt burden increases affecting liquidity

Equity Financing

The shares can be issued by Expansion Group Ltd to equity holders in order to garner funds and effectively meet its operational tasks. It is useful as no liability arises to pay to shareholders only dividends are paid.

Advantages

  • No debt burden prevails to pay shareholders
  • It is a suitable method of raising funds in comparison to bank loans.

Disadvantages

  • Control is being observed by shareholders on money provided by them.
  • A certain rate of return is to be paid by the company (Golden and McMahan, 2017).

These alternative options can be chosen by the CFO. There certain issues within this project is as expenses are more in quantum leading to decreased revenue. It has resulted in more cash outflows than inflows. Furthermore, it is required that external factors prevailing in Turkey must be assessed so as to minimise risks up to a high extent. However, it can be interpreted that the project should not be undertaken as NPV is not good.

Need Personalised Assistance from Our Experts?

Share Your Requirements via Whatsapp!

Chat Now

CONCLUSION

Hereby it can be concluded from the above report that NPV is an effective method for testing the viability of the business. Expansion Group Ltd should not make investment in the project as NPV is negative which means that adequate returns will not be generated. Furthermore, choices of funds are available which can be opted as per the requirement of the firm to meet operational tasks.

Download Full Sample
Cite This Work To export references to this Sample, select the desired referencing style below:
Assignment Desk.(2024) Importance of Investment Evaluation - Expansion Group Ltd Retrieved from: https://www.assignmentdesk.co.uk/free-samples/commerce/jnb518-importance-of-investment-evaluation-expansion-group-ltd
Copy to Clipboard
Importance of Investment Evaluation - Expansion Group Ltd Assignment Desk ,(2024),https://www.assignmentdesk.co.uk/free-samples/commerce/jnb518-importance-of-investment-evaluation-expansion-group-ltd
Copy to Clipboard
Assignment Desk (2024) Importance of Investment Evaluation - Expansion Group Ltd[Online]. Retrieved from: https://www.assignmentdesk.co.uk/free-samples/commerce/jnb518-importance-of-investment-evaluation-expansion-group-ltd
Copy to Clipboard
Assignment Desk Importance of Investment Evaluation - Expansion Group Ltd. (Assignment Desk, 2024) https://www.assignmentdesk.co.uk/free-samples/commerce/jnb518-importance-of-investment-evaluation-expansion-group-ltd
Copy to Clipboard
Assignment Desk Importance of Investment Evaluation - Expansion Group Ltd. [Internet]. Assignment Desk.(2024), Retrieved from: https://www.assignmentdesk.co.uk/free-samples/commerce/jnb518-importance-of-investment-evaluation-expansion-group-ltd
Copy to Clipboard
Struggling with writing assignments? Take our academic writing services to resolve your problems. We not only provide online assignment help but also various other services like thesis, dissertation, and essay writing services. If you have any doubts about our experts, then we suggest you check our “Samples” before seeking dissertation help from us. Our experts can ease the complexity of your work. All you have to do is ask, “Can you do my assignment?”
Boost Grades & Leave Stress

Share Your Requirements Now for Customized Solutions.

Lowest Price
USD 6

    Delivered on-time or your money back

    100+ Qualified Writers

    For Best Commerce Assignment Help

    View All Writers
    FREE Tools

    To Make Your Work Original

    • tools Paraphrasing Tool

      Check your work against paraphrasing & get a free Plagiarism report!

      Check Paraphrasing
    • tools Plagiarism Checker

      Check your work against plagiarism & get a free Plagiarism report!

      Check Plagiarism
    • tools Dissertation Outline Generator

      Quick and Simple Tool to Generate Dissertation Outline Instantly

      Dissertation Outline Generator
    • tools Grammar Checker Tool

      Make your content free of errors in just a few clicks for free!

      Grammar Checker
    • tools Essay Typer

      Generate plagiarism-free essays as per your topic’s requirement!

      Essay Typer
    • tools Thesis Statement Generator

      Generate a Compelling Thesis Statement and Impress Your Professor

      Try Thesis Generator Tool

    Professional Academic Help at Pocket-Friendly Prices!

    Captcha Code refresh

        Estimated Price

        USD 6.32 25% OFF
        Total Price USD 6
        182532+Delivered Orders 4500+PhD Writers 4.8/5Client Rating

         
        AD whatsapp

        Limited Time Offer

        Exclusive Library Membership + FREE Wallet Balance