Financial Management Datf

Appraisal techniques | Advantages | disadvantages |
NPV | Essential for financial apprail of long term project, it measures the excess or shortfall of cash flows.In the NPVmodel, it is assumed to be reinvested at the discount rate used. | The adjustment for risk by adding a premium to the discount rate thus making cost higer.Risk premium is composite of Risk free rate, such compounding resutls very low |
IRR | It calculates an alternative cost of capital including an appropriate risk premium. It consideres all cash flow of the project and the time value of money. | IRR cannot be used to rate mutually exclusive projects, it means where people have to choose one project not both.Cannot be used in the usual manner for projects that start with an intial positive cash flow. |
Payback Period | It gives an exact period to pay back loan or financing. Diference between Cash inflows and Outflows are also outlined.It is very simple to compute, and provides some information on the risk of the investment and a crude measure of liquidity. | It doesnt deal with Time value of moeny, thus firms pay more than they acquire. It has limitation with inflation as well, rise of inflation can cause serious damage to firm’s finance. |

Appendix 1
Glee Plc.
-------------------------------------------------
Extract Balance Sheet as at 31 December 20xx
    £ (‘000,000)
Financed by,
Ordinary Shares of £0.40 each 500
Retained Earnings 300
Non-current Liability
18% of Long-term loan 600
          200
Table 1: The Balance sheet of Glee Plc before £15 million has raise.

Table 2: The balance sheet after Glee Plc. had raised the £15 million

Glee Plc.
-------------------------------------------------
Extract Balance Sheet as at 31 December 20xx
      £ (‘000,000)
Financed by,
Ordinary shares of £0.40 each 500
18% of Preference shares of £3 each (15million× 70%)                                             10.5... [continues]

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