Investment appraisal report for introduction of christmas star in the product range of m/s noel plc - Essay Example

It is very simple to useIt surmises on the fact that the longer time forecast of a company leads to more uncertainty. Shorter Pay back will involve less uncertainty in forecasting of future cash flow.Disadvantages: It ignores the cash flows after the end of the Payback period.It ignores the time value of Money. This drawback can be overcome by the use of discounted Payback in which the cash flows are discounted prior to the calculation of payback period. 2. Accounting Rate of Return: Accounting Rate of Return is based on accounting profit.

Accounting Rate of Profit (ARR) can be defined as the percentage of Average Annual Profit of an Investment to the Average Investment.Where,Average Investment = (Initial investment + scrap value) / 2Advantages: By using Profit figures, this technique relates to the return on capital employed directly. The result of this calculation is in percentage, which is easily understandable by most business people.Disadvantage: Here also it ignores the time value of money It uses the accounting profit rather than cash flows.

Cash flows represent solid power over resources, whereas Accounting profits are subjected to the application of accounting concepts.3. Net Present Value: It is a discounted cash flow method of investment appraisal. It uses the method of discounting future cash flows to its present values. The sum of the future cash flows less the initial investment gives the Net Present value of a Project.Advantages: Its main strength is its recognition of time value of money.As it considers cash flow for calculation, it is not affected by the accounting policy of a particular company.

As it takes account of the costs of raising finance, a positive NPV reflects the increase in shareholders'. Its product range of seabed survey components are marketed to a wide spectrum of national and multi-national oil service companies based in the UK and the North Sea periphery states. A proposal is under consideration to manufacture a new advanced technology underwater camera - the "Christmas Star". The company has identified a market segment for the product, which is poorly served currently.

The anticipated market life of "Christmas Star" estimated to be 5 years. The marketing director's assessment; this product will be attractive to the existing customer machinery base and also will generate new business in generally, a highly competitive market place. I will make a financial appraisal of the capital investment for the project. 3. Net Present Value: It is a discounted cash flow method of investment appraisal. It uses the method of discounting future cash flows to its present values.

The sum of the future cash flows less the initial investment gives the Net Present value of a Project. 4. Internal Rate of Return: Internal Rate of Return is the discount rate that gives a zero NPV. The acceptance criteria of this method of appraisal are; IRR should be greater than the discount rate on the presumption that a project with higher IRR than the discount rate generates higher returns. Calculation of IRR is easier as it does not require precise cost of capital discou