Assignment Sample BU7403 Finance for Manager
Introduction
Investment appraisal is a very important aspect of the business. These are critical tools for a business owner to understand the feasibility and viability of a project because correct investment determines the growth and profitability of a company.
a) Calculation of NPV
| Project Alpha | ||||||
| Year1 | Year 2 | Year 3 | Year 4 | |||
| Income | 25,00,000 | 27,50,000 | 32,50,000 | 35,00,000 | ||
| Less: | Expense | 12,50,000 | 13,50,000 | 15,00,000 | 17,50,000 | |
| Income before tax | 12,50,000 | 14,00,000 | 16,50,000 | 17,50,000 | ||
| Less: | Tax @20% | 2,50,000 | 2,80,000 | 3,30,000 | 3,50,000 | |
| Profit after tax | 10,00,000 | 11,20,000 | 13,20,000 | 14,00,000 | ||
| Discounting factor: @10% | ||||||
| Discounted cash flow | 9,09,000 | 9,25,620 | 9,91,736 | 9,58,248 | ||
| Cumulative discounted | ||||||
| cash flow | 37,84,604 | |||||
| Less: | initial investment | 17,50,000 | ||||
| Net Present Value | 20,34,604 | |||||
| Project Gamma | ||||||
| Year1 | Year 2 | Year 3 | Year 4 | |||
| Income | 24,50,000 | 24,50,000 | 24,50,000 | 24,50,000 | ||
| Less: | Expense | 9,00,000 | 9,90,000 | 10,00,000 | 11,00,000 | |
| Income before tax | 15,50,000 | 14,60,000 | 14,50,000 | 13,50,000 | ||
| Less: | Tax @20% | 3,10,000 | 2,92,000 | 2,90,000 | 2,70,000 | |
| Profit after tax | 12,40,000 | 11,68,000 | 11,60,000 | 10,80,000 | ||
| Discounting factor: @10% | ||||||
| Discounted cash flow | 11,27,160 | 9,65,289 | 8,71,525 | 7,39,220 | ||
| Cumulative discounted | ||||||
| cash flow | 37,03,194 | |||||
| Less: | initial investment | 15,00,000 | ||||
| Net Present Value | 22,03,194 | |||||
It is to be asserted that the net present value appraisal method for Company Bravo, is an important method as it can be concluded that the NPV is obtained from the investment and shows the absolute value of the cash flow that is viewed as the unrealized capital gain of the company (Gaspars-Wieloch, 2019).http://BU7403 Finance for Manager
It is understood from the table mentioned above that project gamma has a higher net present value of 22,03,194 in comparison to 20,34,604 derived from project alpha.
Thus, it can be seen that the project alpha provides greater returns on the investment and greater value addition to the company, especially with regard to the objective of sustainable production. Thus, Company Bravo should implement Project Gamma due to its higher NPV value.
b) Critical evaluation of project appraisal methods
In the case of company Bravo for Project Alpha and Gamma, there exist two investment appraisal methods. These are:
Payback period
It is asserted that the payback period denotes the time period needed to recover the initial outflow of cash and the time needed to achieve a breakeven point (Gorshkov, 2018).http://BU7403 Finance for Manager
This method can be critical for the company because of the following reasons:
- It is an easy and convenient method to use and comprehend for business owners
- The method covers the risk element since it stresses on early recovery of the amount that is invested
- It helps in the quick assessment of an investment project (Sarwary, 2019).http://BU7403 Finance for Manager
Thus, the payback period is an important method for Company bravo to assess the project Alpha and gamma. Nevertheless, the company should focus on the loopholes of the method, which are:
- It does not take into account the time value of money, which has an impact on the cash flows occurring in different years
- It does not consider the cash flow that occurs after the payback period and in such a situation, the appraisal method does not give a complete picture of the project in the long run.
Internal Rate of Return
The IRR method and NPV are closely linked. It is asserted that for Company Bravo, the project with a higher IRR will be ranked higher than the one with a lower IRR (Patrick & French, 2016).http://BU7403 Finance for Manager
The method provides the following benefits:
- It considers the time value of money and since the computation highlights return when the net present value is nil, the minimum rate of return is known.
- It is simple and convenient to understand for business owners
However, there are certain disadvantages also linked with this method:
- It stresses the assessment and identification of initial cost and in the absence of it, the evaluation and calculation of the project can be faulty.
c) Critical evaluation of Pricing strategies
Going-Rate Pricing
It can be said that as per this pricing strategy, the firm establishes the base of the price of a commodity mainly on the prices of the competitors for the similar goods or same goods without paying as much stress on the cost of the product and the perception of the value of the product in the mind of the consumers or the difference in the strength of the demand for the good amongst various consumer groups.
It can be seen that based on the situation of the market, Company Bravo can either charge the same price as the market price or charge a price below the competitive price in the market or higher (Ülkü&Hsuan, 2017).http://BU7403 Finance for Manager
Since the competition is very high in the market, Company Bravo will have to charge a price equivalent to or less than the competitive price in the market. The change in the price of the product of Company Bravo will only alter with the change in the market or competitive price or the going rate and not on the demand or the cost of the product.
The rationale behind the going-rate pricing is that the going rate, in the case of Company Bravo, would indicate the collective wisdom of the industry with regards to the condition of demand and in such a case the price, decided would lead to optimum return under such conditions of demands.
Additionally, it is not simple to evaluate the perceived value of consumers or the elasticity of demands or reaction of consumers to changes in prices (Kienzler&Kowalkowski, 2017).http://BU7403 Finance for Manager
Loss leader Pricing
It can be seen that Company Bravo intends to launch a new product in the market. However, it is a brand leader of a complementary product to a new product. Thus, it such a case, it is important to assert that a loss leader pricing strategy denotes an aggressive pricing tactic whereby a company indulges in the sale of a product,
below cost, in order to prepare a broad consumer base, which as per the philosophy of loss leader, would make up for the loss suffered on a product with profit on different goods (Deshpande,2018). http://BU7403 Finance for ManagerIn the case of Company Bravo, the loss suffered on the new product can be compensated with the profit derived from the complementary product since it has a brand reputation and high-value perception in the minds of the consumers.
Conclusion
The research project is conducted on an investment appraisal topic. The research study conducts an investment appraisal for Company Bravo regarding its two projects, Project Beta and Project gamma, and uses the net present value for calculating and assessing its feasibility and viability.
It critically assesses the payback period and internal rate return as a tool for appraisal of investment and analyses the two pricing strategies of the company, which are the loss leader pricing strategy and the going rate tactic.
Reference List
Deshpande, S. S. (2018). Various pricing strategies: A review. IOSR Journal of Business and Management, 20(2), 75-79.
Gaspars-Wieloch, H. (2019). Project net present value estimation under uncertainty. Central European Journal of Operations Research, 27(1), 179-197.
Gorshkov, A. S. (2018). Payback period of investments in energy saving. Инженерно-строительныйжурнал: специализированныйнаучныйжурнал, (2 (78)).
Kienzler, M., &Kowalkowski, C. (2017). Pricing strategy: A review of 22 years of marketing research. Journal of Business Research, 78, 101-110.
Patrick, M., & French, N. (2016). The internal rate of return (IRR): projections, benchmarks and pitfalls. Journal of Property Investment & Finance.
Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting and Finance, 19(3).
Ülkü, M. A., &Hsuan, J. (2017). Towards sustainable consumption and production: Competitive pricing of modular products for green consumers. Journal of cleaner Production, 142, 4230-4242.
