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The Popularity of Financial Ratios in Multivariate Modeling - Essay Example

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In this report, “The Popularity of Financial Ratios in Multivariate Modeling” the author will advise NENE limited on various projects they are hoping to take up. Different appraisal methods will be used including NPV, ARR, Cash flow and Payback period methods…
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The Popularity of Financial Ratios in Multivariate Modeling
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The Popularity of Financial Ratios in Multivariate Modeling

Download file to see previous pages... In six years’ time, it has a higher positive cash flow level of £105 as compared to the Beta of £83.
 The ARR for Alpha is higher than that for Beta at 29.4% while that of Beta is at 1.6%. This is an indication of the viability of the project to perform as expected when acquired. As such the business assets for Alpha are increasing at a higher rate than for the Beta. The rate of ARR for Alpha is an indication of the expected rates of return on the value of the assets for is higher (Robb & Robinson, 2012). The NPV of Alpha is also higher than that of Beta. It indicates that project Alpha will increase the shareholder’s equity more than project Beta. For all these reasons, it is advisable that NENE should choose project Alpha.
 Internal Rate of Return is the method that gives the investors an easy way of estimating the quantity or rate of return that an investment is expected to offer. This is usually the discount rate in which the Net Present Value of the expected cash flows is equal to zero. The method can be calculated through a trial and error method, where the discount rate will be varied until we find where the NPV = 0 (Balmer, 2001). Through a general rule, the IRR with an NPV which is greater than zero is usually preferred. This method also advises that all the IRRs with values higher than the opportunity cost of capital of the project should always be accepted.
 While using this method, one is able to estimate the return on the initial invested amount. The method is also easy to use as its calculations are not very complex. The method also provides a clear and easy way of comparing the projects to come up with the most preferred.
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