Essay on Project D. Initial Investment Appraisal

Essay on Project D. Initial Investment Appraisal

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Q1. Investment appraisal
(a)
Project A
Project B Project C Project D
Initial investment
$120000
$160000 $90000 $70000
Annual cash flow ($40000-$16000-$12000)

$12000
($75000-$27000-$16000)

$32000 ($60000-$15000-$9000)

$36000 ($60000-$18000-$7000)

$85000
Payback period: initial investment/ annual cash flow
120000/12000

10 years 160000/32000

5 years
$90000/36000

2.5 years $70000/85000

2 years

Project C and D are acceptable as both of their payback periods are less than the pre specified number of years which is 3 years in this case. According to the payback method of analysis, projects with shorter payback periods are better to invest in, Hence, project D should be accepted as it is most liquid and less risky to invest in.

(b)
Project A
Project B Project C Project D
CFj (0) -120000 CFj (0) -160000 CFj (0) -90000 CFj (0) -70000
CFj (1) 12000 CFj (1) 32000 CFj (1) 36000 CFj (1) 35000
Nj 10 Nj 10 Nj 18 Nj 15
IRR?? 0.00% IRR?? 15.10% IRR?? 39.91% IRR?? 49.88%

In order for a project to be acceptable it must be higher than the required rate of return. Assuming all the projects are independent, Projects B, C and D are acceptable under this criterion as their IRR is higher than the hurdle rate of 15%.

(c) Both methods are not consistent in giving the answers for accepting or rejecting the projects because they value different elements of capital budgeting. The internal rate of return represents the rate quantity. IRR also represent the efficiency, quality and yield of the investments (Boundless, 2016). On the other hand, payback period method calculates the amount of time required to repay the investment. In order to invest in the project that will be efficient and profitable for the company it is recom...


... middle of paper ...


...MHJ has 0.465 assets to repay $1 of liability in 2015 and 0.476 in 2014. This is an indicator that MHJ is not able to repay it debt when they fall due.
Profitability
Formula 2015 2014
Gross profit margin Gross profit/sales 0.640 0.640
Operating profit margin EBIT/sales 7.95 8.88



REFERENCE LIST

Besley, S., Brigham, E. (2014) CFIN (4th edition). Australia, south-western.

Boundless. “Advantages of the IRR Method.” Boundless Finance. Boundless, 26 May. 2016. Retrieved 23 Aug. 2016 from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/advantages-of-the-irr-method-403-4845/

Damodaran, A. (2011) Applied Corporate Finance (3rd edition) p. 171. New York, U.S.A

Titman, S., Martin, T., Keown, A.J., Martin, J.D (2016) Financial Management: Principles and Application (7th edition). Australia, Pearson.


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