Project Appraisal & Finance - Essay Example

We have to clarify the two sets of key questions we are dealing with. The first answers the questions "what" investments are and "why" they are important for a business, whilst the second answers the question of "how" investments decisions are made. The second part of our paper elaborates and expands on some of the key concepts that we cover in the first part. In the process, we hope to acquire a deeper understanding of the principles, methods, and issues that have to be considered in investment decision-making.

This paper will closely simulate the complex world of top management decision-making faced by any business on a daily basis, and where no single discipline - finance, production, corporate social responsibility, or general management - dominates. As we look at all the conceivable angles that any normal business looks at prior to the making of an investment decision, we can realise that just like in the real world, we need to make choices. Hopefully, our discussion will show that management decision-making is a complex task, that every decision made today can have far-reaching consequences, and that any professional manager who wants to be a worthy practitioner of the art and science of management must take his or her educational preparation, and eventually his or her responsibility as a manager very, very seriously.

The ABC Mining plc CaseFor purposes of clarity in our understanding of the assumptions used in our discussions and the consequent calculations to arrive at our decisions, we summarise the key facts of the case.ABC Mining plc is investigating the possibility of purchasing an open-cast coal mine at a cost of 2.5 million which the government is selling as part of its privatisation programme. It would invest in and operate the mine for four years, after which it would clean it up and sell the assets.

The Finance Director prepared the projected profit and loss accounts shown in Table 1, and in his report to the Board of Directors recommended that the company should not proceed as the profitability of the proposal is poor.The following are the questions that need to be answered:First, what could be considered as the most appropriate investment appraisal methods which would help the company to decide whether or not to proceed with the projectSecond, explain why we consider the investment appraisal methods just discussed to be the most appropriate for evaluating investment projects.

Third, we would discuss briefly whether the project should go ahead.Table 1: ABC Mining plc Profit and Loss Statement (in millions)Year 0Year 1Year 2Year 3Year 4Year 5CommentsInvestmentsPurchase(2.5)Paid to governmentEquipment(12.5) Financed 10m debt at 12%Sale of Equipment2.5Year 5 sale of vehicles/eqptWorking capital(0.5)One-time investmentSunk costs(0.2)Included in Year 1 write-offSurvey costs(0.4)Counted in Year 1Clean-up(0.4)Net vehicle sales2.1 Sales9.4 9.8 8.5 6.3 Less: Direct ExpWages(2.3)(2.5)(2.6)(1.8)Incl.