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Finance Assignment Question
1. Why is the investment appraisal process so important?
2. The concept of relevance applicable to the determination of the project’s cash flows stating all assumptions made?
3. What are the criticisms of the methods used in the investment appraisal process?
4. A critical review of the logic behind the decision making process?
Finance Assignment Answer
Capital investment is considered as an effective activity in most of the organization. Expenditures are relatively high, which includes assets such as machinery, building and IT equipment. Expenditure is done in order to get benefits for the long term which includes some risk. In order to ensure that a better decision is taken for new capital investment projects, it is very necessary to conduct investment appraisal (Lazonick, et al., 2010). The capital investment decision process required evaluation, prioritizing among many projects and selecting an appropriate project which will provide competitive advantage to the company. The decision maker needs to know how to implement a correct investment appraisal method as it will directly influence the operation of business. If the decision is correctly taken, the company can gain many strategical and operational benefits from the proposed project. Else, the companies will lose all the operational benefits due to a wrong decision. The different traditional methods of capital investment appraisal are average return on investment, payback period and NPV. The major aspects that the decision maker should consider while making a proposed investment either in replacement assets or in new assets are as follows: the cost of capital, the cash flow of the project and its timing and the tenure of the project (Ashbourne, Alex, 2010).
In this report, Rolls Royce was used for analyzing the investment proposal of a project using discounted cash flow method and payback period (traditional method). In this report, first the assumptions associated with discounted cash flow methods and payback period method was discussed. Then, both the methods are analyzed critically to discuss the limitations of the method. Then the investment proposal is discussed using both the methods. The findings of the analysis are presented in the appendix but the process used to analyze is mentioned in the body of the report……….