This article aims at carrying out an investment appraisal activity for a company named as The Zeta plc. The company has found an opportunity to manufacture a series of exclusive sailing boats over a period of four years and it is intended to dispose of the project after four years. However, the company needs to evaluate this investment opportunity as to whether it would be viable for the company on financial grounds or not (Baker et al, 2011). The overall project is mainly appraised by the discounted cash flow based techniques which include Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI) and lastly Discounted Payback Period (Dis. PBP). The theme of this article is set in such a manner that each of the above mentioned techniques are explained on their theoretical grounds and then the findings of the project of The Zeta plc are evaluated on the basis of underlying theories. At the last stage of this article, the main assumptions are stated which are used in conducting the investment appraisal of the project followed by the appendix in which the detailed workings are shown to arrive at the findings. Net Present Value The most famous technique which is highly used and regarded by the financial analysts and project evaluators is that of Net Present Value (NPV). NPV is famous due to many reasons are stated below: NPV works on the basis of discounted cash flows rather than profits due to which it provides those results which demonstrate the increase or decrease in the net discounted cash flows as a result of either accepting or avoiding any project (Vishwanath, 2007). NPV also takes into account the time value of money as a result the most actual cash flows are incorporated and used for the project appraisal (Brigham. 2008). NPV is also considered as the true measure of investment appraisal as it provides the ultimate results in absolute currency units rather than in relative terms such as percentage or ratio. NPV is computed by deducting the initial investment or cost of the project from the Present Values of the Cash Flows of the later years (Baker, 2011). If the computed figure turns out to be positive, it means that the project will increase the cash flows of the company, so the project should be accepted. However, if the computed figure shows a negative figure, it results in loss of cash flows therefore the project should be rejected or avoided. If the project under scrutiny of The Zeta plc is taken into consideration, the initial investment of the project is around ?270,000 and the project has a life of around 4 years. The company has the intention of selling off the whole project at the end of 4th year with the residual amount of ?108,000. The revenue streams of the company begin with 2nd year of the project however the cash based operating costs are incurred from the year 1 of the project. With the discount factor of 15%, the NPV of the project is computed as ?91,858 which is positive. Hence, the project sounds feasible on the basis of financial grounds by the help of the findings of NPV. Internal Rate of Return Another measure which is also quite used in appraising the projects is that of Internal Rate of Return (IRR). This technique mainly facilitates the providers of finance as it assists them
Investment Appraisal: The Zeta plc Case Introduction One of the major objectives of any company is to make itself efficient enough to undertake expansion of its business activities which can also be named as growth activities. Growth of any organization is mainly occurred either as organic growth or as growth through mergers and acquisition (Brigham et al, 2008)…
Nonetheless, the financial resources that are available for the projects are more likely to be limited. As a result, the management has to evaluate the project’s viability in order to determine the best project to invest in. Through the use of investment appraisal techniques, a company is able to decide the whether or not a project is viable to undertake (Needles, Powers, & Crosson, 2011).
Taking this strategic move into account, the company is conducting an investment appraisal in order to evaluate which of the two options is more financially feasible. The company’s cost of capital is 12%. It is assumed, in the absence of information provided, that this is the weighted average cost of capital (WACC) for the company which is calculated with the help of the following formula.
Real options are different from other convectional financial options such as call and put options since they are not typically traded as securities in stock futures market. Corporate decisions today can only be made when a set of alternative strategies on investments are obtained.
From the calculations, it will be possible to assess whether the company can finance its operations entirely from equity or it will be necessary to access some capital from borrowing that will have to be repaid. The financial manager of Matero PLC will have to consider Capital budgeting as a vital parameter in making this decision.
The company has been expanding by leaps and bounds during the past decade and its operational and financial outlook looks amazing. In August 2004, the company made its Initial Public offering (IPO) and officially got listed on the NASDAQ index. The paper presents an analysis regarding whether the shares issued were at premium or below the rightful price.
It looks into the suitability of the proposed introduction of the product in financial terms and gives recommendation)
M/s Noel Plc. is a medium sized corporate based in Aberdeen, Scotland. It specializes in manufacturing of offshore drilling components.
In other words, the system of capital budgeting is employed to evaluate expenditure decisions which involve current outlays but are likely to produce benefits over a period of time longer than one year.
But according to the authors, DCF procedures can work if the management sets realistic hurdle rates, and carefully examines its assumptions. Decision makers need to consider three critical issues: the effects of inflation, the different levels of uncertainty in
The company uses the straight-line method to depreciate assets and estimates its cost of capital at 18%. Because of capital rationing, only one project can be accepted. To calculate depreciation expense on a fixed asset with a salvage value, the depreciable value of the fixed asset is divided by the life of that asset.
The company’s cost of capital is 12%. It is assumed, in the absence of information provided, that this is the weighted average cost of capital (WACC) for the company which is calculated with the help of the following formula.
WACC is calculated by multiplying the
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