Investment Appraisal – Essay Question
Q3) Using quantitative and qualitative information, suggest which school Felix and Holly should invest in.
In the case study we are told that Felix and Holly are finding it hard to decide whether to invest in a soccer school or a netball school. They can use many different investment appraisal techniques which are both qualitative and quantitative in order to identify which investment would be most appropriate or worthwhile. They need to consider the level of risk involved, how quickly the investment will take to pay off and whether the investment will be profitable.
There are three main types of quantitative investment appraisal techniques that Felix and Holly could use to identify which investment is most profitable. The first investment appraisal technique is payback and this measures how quickly the investment can be paid back. Using the estimations that Felix and Holly have submitted, the payback period for the soccer school is 3 years and 4 months. The payback period for the netball school is 2 years and 8 months. This means that Felix and Holly would be better off investing in the netball school as it would take a shorter period of time to cover their cost. Another investment appraisal technique that could be used is accounting rate of return. This appraisal measures the profitability of any investment and the profit is expressed as a percentage. For the soccer school the accounting rate of return is 8.8% whereas it is 17.6% for the netball school. The comparison between these two proves that the netball school would be a better investment as the percentage of accounting rate of return is much higher than that of the soccer school. In addition, another quantitative method of appraisal is net present value. Unlike payback and ARR, this investment appraisal considers the value of money over time. It converts all monetary values into today’s values to allow for a realistic assessment of the returns of the years...
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