Many businesses around the world still fail because their capital investment decisions are based
upon a calculation on the back of an envelope and do not take any of the correct factors into account. Even
larger businesses often get this wrong. This is a true sign of poor resource management.
Do you agree or disagree? Discuss the alternative methods of investment appraisal and describe the
limitations of these to help justify your arguments. How do you think that capital budgeting decisions should
ideally be made by different types of organisations?
Also,
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don�t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
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Capital Investment Appraisal
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Capital investment appraisal is an important tool of planning process that help to make
decisions on what to invest in based on their returns and initial capital of investment (Harris et
al., 2011). For example, capital budgeting in SME’s helps a company to decide future
investments such as entry into new markets, expansion of business activities and also the
inclusion of new activities. Examples include; Accounting Rate of Return (ARR), Net Present
Value (NPV), Internal Rate of Return (IRR) and Payback Period (Davies & Crawford, 2011).
Calculate the Missing answers
Project 1 Project 2
ARR 33% 18.7%
NPV (£’ 000) 15 210
IRR 25% 53%
Payback Period (yrs) 0.556 3.2
Workings
ARR for project two
Annual Depreciation = (Initial Investment – Scrap Value) / Useful Life in Years
Annual Depreciation = (£1616000 – £301,000) /15% =£197,250
Average Accounting Income = £500,000 – £197,250 = £302,750
Accounting Rate of Return =302,750/1,616,000 = 0.187 =18.7%
Where
Co = -Initial Investment =556,000
C = Cash Flow = 200,000
r = Depreciation rate = 15%
T = Time = 5yrs
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= -556000+570994
=14,994
Therefore, NPV is 14, 994
14,994 = -556,000 + (500,000)/(1+IRR) + (500000)/ (1+IRR 2 )+(5200000)/(1+IRR 3 )+
(200000)/(1+IRR 4 )+ (200000)/(1+IRR 5 )
14994 = -1616000 + (500000)( 1+IRR+1+IRR 2 +1+IRR 3 +1+IRR 4 1+IRR 5 )
14994= -1616000 + (500000) + (5/1+IRR)
14994+1616000 = (500000) + (5/1+IRR)
1630994= 2500000/1+IRR
1630994(1+IRR) = 2500000
1630994+1630994IRR =2500000
16309941IRR = 2500000-1630994
1630994IRR = 869006=869006/16309941
IRR= 0.532= 53%
Payback Period for project One
Payback Period = Initial Investment/ Cash Inflow per Period
= 0.556
References
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Harris, E. P., & El-Massri, M. (2011). Capital Investment Appraisal. Review of Management
Accounting Research, 343.
Davies, T., & Crawford, I. (2011). Business accounting and finance. Pearson.
