Task 4: Project Appraisal - Essay Example

Project Appraisal Project appraisal entails assessing, the case for proceeding with a project in a structured way. From the time to time organizations need to determine the current and the future needs of their business. This may be in the form of acquiring new plant, machine, technology or replacement of the old equipment. All these require good planning, analysis and selection of the appropriate project in order to ensure that scarce resources are effectively and efficiently utilized. In this financial case, there are two projects that are to be evaluated so as to achieve better spending decisions for capital.

The organization has two options to choose from. One, it weighs between buying a lorry for its marketing department or upgrading the computer systems in its marketing department so as to increase sales for the organization and enhance its competition in the market. The initial capital spending for the purchase of the lorry is £10 000 and for the upgrading of the computer system would cost an initial capital of £5 000.The economic life of the lorry is estimated to be five years without any residual value and the upgrading of the computer system in the marketing department is to be done after every five years and, therefore, in this case its economic life was taken as five years with no residual value.

The values for the estimated revenues are as indicated below; A lorry up grading computer systems Year Revenue expected (£) Revenue expected (£) 0 (10 000) (5 000) 1 2 500 4 000 2 2 000 3 000 3 2 000 2 000 4 1 000 1 500 5 1 000 1 000 The purpose of project appraisal is to establish whether a project is worthwhile in the light of its costs in forms of resources commitments and the projects expected benefits.

As Hendrickson and McNeil (2000) put it, “Selection is made on the basis of a systematic analysis of expected revenues and cost overtime for each project alternatives.” After estimation of the revenue expected from the projects then the following step is to do the analysis of the projects so as to choose the feasible one(s) that would increase the organizations value and its net worth. Several techniques can be used to appraise various projects such as payback method, internal rate of return, net present value and many others.

For this financial case, as indicated by Harold Bierman and Seymour Smidt (2012). “We continue to advocate the net present value method. In practice, most projects are analyzed using an estimate of the expected cash flow. The most common procedure for coping with risk is to use a risk-adjusted discount rate.” The net present value scheme is used to appraise the two projects and then used to select the best project for the organization. Purchase of a lorry Year present values factors (PVF) revenue expected (£) Present values (£) 0 1 (10 000) (10 000) 1 0.

9091 2 500 2272.75 2 0.8264 2 000 1652.80 3 0.7513 2 000 1502.60 4 0.6830 1 000 683.00 5 0.6209 1 000 620.

90 Net present value (NPV) (3267.90) Up grading computer system Year PVF revenue expected (£) Present values (£) 0 1 (5 000) (5000) 1 0.9091 4000 3636.

40 2 0.8264 3000 2479.20 3 0.7513 2000 1502.60 4 0.6830 1500 10 24.50 5 0.6209 1000 620.90 Net present value 4263.

60 The appraisal of the two projects illustrates that the purchase of the lorry for the marketing department to carry out marketing activities for the organization is not viable as it would only contribute negatively to the organization. The net present value a negative value which means in five years after the purchase of lorry the returns that it shall bring to the organization would be less than the cost incurred to purchase it hence it would reduce the net worth of the organization in the long run.

Therefore, the lorry should not be purchased as it has a negative return, -3267.50. On the other hand, upgrading of the computer system in the marketing department has proven to be feasible. This is due to the good cash flow that it can generate for the organization. In today’s world, most customers prefer to purchase various products from the organization through online. This will contribute to the greater cash flow to the organization due to wider market reach if the system is upgraded. The projects’ net present value is positive, +4263.

60, which means that, its contribution to the organization will improve the organizations net worth. Therefore, the upgrading of the computer system in the marketing department should be implemented. In conclusion, capital expenditure is money or resources that a company uses to acquire or upgrade a business asset so that it increases its net worth in the long run. Various organizations need to make different economic decision of which if not done well may hamper the operation of the organization or any of its departments.

These various alternatives need to be evaluated and appraised so that the best is selected. This increases the capacity or efficiency of the organization due to proper allocation and utilization of the resources References Hendrickson, C, McNeil, S, 2000, Project selection from alternatives, Boca Raton: CRC press LLC. Harold Bierman, Jr, Seymour Smidt, 2012, Business & economics, Routledge.