Project Appraisal - Assignment Example

? s Topic s Contents Introduction……………………………………………………………………………………. 3 Activities Undertaken………………………………………………………………………...... 4 Discussion……………………………………………………………………………………… 6 Recommendation………………………………………………………………………………..9. Conclusion………………………………………………………………………………………10 Introduction Project appraisal is a structural process through which management uses to determine through careful assessment the most viable project. From a well appraised project, great achievements can be achieved in case the project implementer applies the appropriate skills. Appraisal is done through assessment of data through assumptions and methodologies used when preparing a project. For instance, it involves the work flow, proposed financing, an assessment of the projects managerial aspects, cost estimating, finance validity, and how the project will be a benefit to society through factors like employment. Project appraisal happens in various types depending on the kind of project being determined its viability. It therefore cover an analysis of techniques being used, managerial aspects of the firm, analysis social factors like income and employment, assesses the impact of financial judgments among other financial activities, determines how is the project viable in terms of economic undertakings. Project appraisal involves various discounted and undiscounted techniques. The undiscounted techniques include payback period, value added, capital-output ratio, an outlay of proceeds per unit, and average of the outlay of proceeds per unit. However, the discounted techniques may be listed as net present worth, benefit cost ratio, internal rate of return, net benefit investment ratio, sensitivity analysis; and earnings before interest tax depreciation and amortization CEEU, 2005).. According to Ian, David & James, whenever the management is making decision it has to involve the above project appraisal techniques. To illustrate more of these, from our class work, students were given an online simulation test. As per the tests, students were supposed to think of themselves being the chief executive of the doll industry of US. They were supposed to do simulation for a period of five years (from 2009 to 2014) and it is the result they get would be used to test their knowledge on various techniques of business appraisal. Activities Undertaken At the beginning of the project, the company had basic net revenue of 3.23. With the firm`s expansion aim, the net revenue was expected to increase. Consequently, the student had to decide on projects from the available data with an assumption that it was a representation of the real data gotten during the research over the doll industry. The data could have included the past number of buyers of the product or the data recorded from market testing and the information collected from competitors` websites. With their target being kids and their playing devices, the students had to keep on updating various products to enhance their marketability over that of their competitors. It was a call for more implementation of technological experiences into the products to move with the increasing innovation in the world. Thus, to win parents heart, the products were developed being future oriented especially with what every parent could have dreamt of his kids and for the kids is about their dream being put in toy. Taking the managerial role, students tried to change the various rates of interest of the production, licensing and retail parts of the project. What students noted in that project. They affected investment analysis tools, but they only affected other output from the project after making a decision of investing on a particular project. This means that, there are those basic factors to be determined before investing and once the student make a decision on the project, the projects financial statements may be affected either positively or negatively. Nonetheless, it was noted they used standard rates of interests where applicable In the first project, at year 2009 the students choose two projects for implementation and as the tester of conditions in the market. The project chosen were Retail Store Expansion in North East since it needed no starting capital and the new doll film/DVD. These two projects were independent of each other. For the second selected project, its selection involved an APV, income of the firm and projects, and the recommended budget. With the emerged technology, kids had to be developed with it. Firstly, this project would make kid aware of the DVD technology and it would enhance the character of kids who were meant to be actors. Besides, the project was enhanced by production sites like Hollywood which was willing to provide relevant resources at a low cost. However, this project viability was very low since it EBITDA was below However, if it hit the market, it will have had the highest return in this year’s project proposed since its worth after five year is reflected by EBITDA as being above five. Its lifetime cost was considerable low at a low starting capital. The project had the quickest payback period, a higher profitability index, the highest internal rate of return and net present value. Moreover, students changed the interest rates, and at the standard discounted values. All these factors twined by the idea of it being at medium risk, students consider it to be the best. In the following year, they choose Toddler Doll Accessory line and new east coast distribution facility at a normal discounting rate, PI, lowest discount rate applicable. Although the project had high risk, there were other factor that made it worth like huge NPV and high IRR figures at a displayed low EBITDA. Moreover, the two projects were independent. After submitting the results, students observed that APV had risen and they decided to note of net income. It was found out that net income was at margin of plus five which was an increase in profit. Moreover, it was worth noting that the balance sheet was showing a more assets and the total valuation indicating an increase in worth. At year 2011, students chose project which include mutually exclusive projects, that is, twin book series and doll movies at the normal discount rate. For these projects, the profitability index was very high. It had low risk, a low starting capital and overall fee. Though the net income lowered, the revenue of the firm increased together along with the APV. For the year 2012, students decided to choose project that would ensure high revenue. They therefore opted for toddler music CD at the fault discount rates and virtual dolls. These gave a sell of twice the expectation. Lastly, in year 2013 they used to above factors to decide on the Eddie Supplier Software which had high NPV, IRR, PI and overall worthy was high. At the end of my project the students had received an APV of 404.66 which was worth considering the initial APV. Revenue, income and net income had increased considerably. The valuation analysis showed an increase in debt free cash flow. For the cases of balance sheet, the cash balance had improved all along. Discussion From the project, students started by being given various measure of company`s worth like adjusted present value, revenue, operational cost, and net income. Various charts that were meant to students determine the progress of the firm. These were the cash flow and revenue divisions of the firm. The given budget as the starting fee showed the students that they had to be wise in order to ensure the capital available is sustainable to meet all needs of starting projects each year for five year. In addition, simulation showed various tools used to show the worth of the firm like income statement and balance sheet. Therefore, every decision that was made should have helped to assess these tools. Moreover, cash flows presentation gave a pictorial representation of how liquid the firm assets are and the various methods the firm has undertaken to utilize the cash circulating. In the simulation, the financial analysis tool shows the overall financial transaction of the firm and hence valuation of it. . From the study of the simulation, the students choose various projects using a combination of techniques of project evaluation as stated in activities carried out. For the year one, the student choose the only one projects as a tester of the market, for the second year, student choose two after they have learnt what the market is all about. In the year three, they choose the student considered choosing two projects to enhance profits, in year four and five; they selected one because the viability of most businesses must have gone down. In fact, they are referred as mutually exclusive, because their establishment is meant to expand the already in existence project. For mutually exclusive, students picked the project offering the highest NPV and IRR. On the other hand, independent projects do not effect the selection of the other. Once they are put in place, they can co-exist without competing. When choosing among independent projects, the student used took the NPV as long it was positive and for the IRR, it was selected in case it was greater than discount rates. One of the major factors that were checked during my simulation was EBITDA. The meaning of this is earning of a company before deduction of interests, depreciation, taxes, amortization and depreciation. According to HMSO(2003), EBITDA is a non GAAP measure and it generally act as the reversal of income statement. During simulation, students used EBITDA to determine the profitability of the various projects. It thus accounts of the profits the company gets from its activities and operations. In case of the negative EBITDA, it was interpreted that the system performance was very poor and had a problem needing quick acting. For this case, I students avoid those projects with negative EBITDA as this would give their business a hard start and therefore lowering its worth. However, they could embrace the businesses with a high EBITDA rates especially when the rate is above 1 because it assures of profitability margin being reached. Therefore used EBITDA to estimate the leverage of the company and determine its profitability (Ian, David & James, 1974). In accordance to Chienweike (2010) quote whether the management did not think of EBITDA tool paying enough for the capital of expenditure, the students never decided on the projects by just this technique. The other techniques which were deemed so important in this simulation are payback method. Since the time for project completion was expressed so important even before determining internal rate of return simply because, students needed this time to be able to know whether the capital you place will have been given enough time to recover itself before the project expires. It gave a perfect valuation method because it outlined that, once the project recovers the invested resources, the investor will start earning profit. Hence, a shorter time in payback process. It leads to quick recovery of the firm and if the same rate of recovering is followed, the company gets massive profit. However, the payback period need to be compared with the net present value of the firm. In order to precisely simulated project will start making profit. Net present value is formula based prediction but in our simulation, it auto generated and that reports our work easier. As Colin H. & John W. (1996) state, this process is among the best appraisal processes because it shows how the project is projected to have a present date profit increase. It is quite different from other processes of appraisal like discounted benefits plus discounted cost process. It was therefore important to look at the projects having a more than zero net present ratios. In student simulation case, there were no projects that had less than zero net present values. It therefore meant according to this project, most of them were viable but to maximize gaining, they choose those projects with a better rate net present value. Despite choosing projects with high net present value, they needed the profitability index to confirm that the firm was really profitable. Profitability index showed the rates through which the considered projects were making profit. It occurred that whenever profitability index was very high, the possibilities of interest rates rising higher increased. During the simulation time, the students choose projects with the highest PI, incase their first choice project through PI was restricted by available budget constraint, they would determine the viability of the next project that had the highest PI and the steps are followed until they achieved the projects fitting for our year. Moreover, another method the student used to get the needed confidence in choosing the appropriate project among the presented was internal rate of return. It was worth noting that, this measure rendered the net present value to be equal to zero and then determines the net worth of the firm. According to CEEU (2005), it basically explains the total amount of interest that is to be gained if the firm is to recover the invested cash and operating cost at a break even rate. It is therefore deems all projects with higher rates than the opportunity cost expected from the capital. In case the choice to be made is in between to competitive projects, internal rate of return proved to be a fundamental tool. In addition, other factors stepped in to give a precision in this decision making. Some among those included the risk rates. The cases of high risk, made more alert because whenever the risk is high one can easily make high profit. Consequently, we kept in mind the possibility of losing easily my invested cost. Besides, there was an issue of the fund needed to start the project and the overall business fee. This was necessary especially after considering the fact that the given resources are always limited. They need to be used carefully and only where the probability of increasing earning is high (CEEU, 2005). Recommendation The various method of valuing projects should have been used with much consideration to the discount rates. Moreover, when discount rates are varied they affect various methods like IRR and NPV. This was noted after varying the various rates of discount. Additionally, the various rates of interest are perfect method to value project and choose between the confusing ones. When they are used together, they give different faces of the project and scrutinize them. Additionally, manager would recommend that when investing, people should be careful to put their money but not fear to invest. Once they appraise the project appropriately, it will show the effects of their undertaking even to long term project due to balance sheet reporting. The projects invested on should be long term but evolving according to demand of the customers. When technology dictates a change, the investment should be in a way they can cope with the change without undergoing the whole restructuring. Additionally, the market from dolly industry is seen to reshape in future of children and the changing direction the world is facing. These explain why the movie world and book making are selling. Conclusion The dolly industry in the future will be used as a tool by parents to change and mould their children lifestyle. The more creative the dollies are, the more they will enhance creativity in children. Moreover, these dollies can be used for narration of stories which our parents used to do in those early times and it will therefore give parent amble time to do other chores beyond parenting. Additionally, the various method of appraising projects been depicted as an appropriate tool for manager. It will always show the right project and give in many faces. Hence, it is made easy for them on how the project breaks down into. References Ian, David & James (1974). Project Appraisal for Developing countries. Heinemann Educational Books Colin H. & John W. (1996) Cost-benefit Analysis and Project Appraisal in Developing Countries. Edward Elgar Publishers. Chienweike(2010)Investment appraisal/capital budgeting-NPV & IRR retrieved from: http://www.accountantnextdoor.com/investment-appraisal-capital-budgeting-%E2%80%93-npv-and-irr/ CEEU(2005).The Public Spending Code: D. Standard Analytical Procedures Overview of Appraisal Methods and Techniques. Retrieved from: http://publicspendingcode.per.gov.ie/overview-of-appraisal-methods-and-techniques/ HMSO(2003).HM Treasury, ‘The Green Book’, Appraisal and Evaluation in Central Government. European Commission, Regional Policy (2008)Guide to Cost -Benefit Analysis of Investment Projects. Read More