Purchase decision of Pevensey PLC among four options of machinery - Essay Example

Download file to see previous pages In this paper two methods for analysis of the investment decision are adopted. These methods include discounted and non-discounted cash flow analysis. The reason for choosing these particular methods is that they are strictly numerical and objective. The solution given by these methods cannot be argued against and can be easily defended if questions are raised pertaining to their legitimacy. Relevant data is also available for using the above mentioned methods of analysis. The initial costs of the four machines, their residual value at the end of their useful life and cash flow generated by the four machines is provided in the case. -Discounted Cash flow simply calculates the differential between the costs and receipts associated with each investment option for the organization. In this particular case, the investment options for the company are the four machines. The benefit of non-discounted cash flow method is ease of assessment and communication to the top management. Discounted cash flow is a modified and improved version of cash flow analysis in which timings of the cash flows are also taken into account. Under this method, value for each cash flow is discounted according to respective cost of capital of the company. This method makes more sense because contemporary organizations prefer gain cash flow as early as possible, so that this cash flow can be reinvested in the business or some other venture. Aversion to risk is the second reason for discounting of because the distant is the date for receipt for cash; the lesser is the certainty of receiving it. An investment is viable if its net cash inflow exceeds the net outflow of cash for acquisition and maintenance of machinery (Gilchrist and Himmelberg, 1995). The cost of capital of ...Download file to see next pagesRead More