Investment Appraisal
Finance individual report
Penta ltd (Investment appraisal)
Introduction
What is investment appraisal? It is the activity responsible for carrying out a cost benefit analysis to justify capital expenditure for a new investment. Capital investment decisions are those decisions that make current outlays in return for a stream of benefits in future years.
. The characteristic of many investments is risk and uncertainty. many organisations prefer to avoid high risk investments but may consider these investments if they believe they will receive a greater return for the increased risk ; but firms can only guess the future revenue and costs of an investment as they are so many different that make the outcome of a investment uncertain for example the economic environment.
Techniques have been developed that try and asses the feasibility of projects and rank investment alternatives as seen below in this case study.
1. An evaluation of the investment opportunities separately
Option one should be undertaken since it has a positive net present value hence maximises shareholders objective of wealth maximisation. Option two should be rejected because it has a negative net present values i.e. the cash out flows are greater than the cash inflows. In the above evaluation the uncertainty that exists is the determination of future expected cash inflows. In the calculation of increases in sales consideration has been made to cater for the increase in negative net present value i.e the cash outflow are greater than the cash inflows. In the above evaluation the uncertainty that exist is the determination of the future expected cash inflows.
In the calculation of increase in sales consideration has been made to cater for the increase in inflation of 2%.therefore where cost will, increase with 50% adjustments are taken at 52% to get the nominal rise in costs.
The WACC has been used to discount the cash flows i.e. 8.6-0.04=8056%.
For option 1 debt constitute
Penta ltd (Investment appraisal)
Introduction
What is investment appraisal? It is the activity responsible for carrying out a cost benefit analysis to justify capital expenditure for a new investment. Capital investment decisions are those decisions that make current outlays in return for a stream of benefits in future years.
. The characteristic of many investments is risk and uncertainty. many organisations prefer to avoid high risk investments but may consider these investments if they believe they will receive a greater return for the increased risk ; but firms can only guess the future revenue and costs of an investment as they are so many different that make the outcome of a investment uncertain for example the economic environment.
Techniques have been developed that try and asses the feasibility of projects and rank investment alternatives as seen below in this case study.
1. An evaluation of the investment opportunities separately
Option one should be undertaken since it has a positive net present value hence maximises shareholders objective of wealth maximisation. Option two should be rejected because it has a negative net present values i.e. the cash out flows are greater than the cash inflows. In the above evaluation the uncertainty that exists is the determination of future expected cash inflows. In the calculation of increases in sales consideration has been made to cater for the increase in negative net present value i.e the cash outflow are greater than the cash inflows. In the above evaluation the uncertainty that exist is the determination of the future expected cash inflows.
In the calculation of increase in sales consideration has been made to cater for the increase in inflation of 2%.therefore where cost will, increase with 50% adjustments are taken at 52% to get the nominal rise in costs.
The WACC has been used to discount the cash flows i.e. 8.6-0.04=8056%.
For option 1 debt constitute