I strongly agree that investment appraisal should bring more value to the business firm.
The business entity usually faces to many difficulties, and they have to choose right decisions to solve them. One of the most essential choices is which project should be invested to maximize level of profitability. Unlike short-term decision-making, it's important to select an appropriate project to invest in a long period of time because it needs more time to recover the initial investment and make profit. Therefore, the firm should analyse carefully before deciding the best project that suits the organization to give a higher return (M W E Glautier and B Underdown, 2001).
Investment appraisal is a good way to add value to the business entity. Even though capital investment requires an expenditure of resources and money, it creates many benefits in future time. A manager in a business organization tends to invest in a project that increases the wealth and value of the firm. Hence, he (her) is interested in investment opportunities that bring return greater than the interest rate (Peter Atrill, 2003).
Thus, organizations should use techniques in investment appraisal such as The Accounting Rate of Return (ARR), The Net Present Value (NPV), The Internal Rate of Return (IRR), or The Payback Period to evaluate and choose the best project to invest that makes good profit and adds value to the entities (Dyson, 2007). .
Question B.
I/ Payback period of project A:.
Using cumulative cash flow to calculate payback period of project A with Initial outlays = £125,000 (Dyson, 2007) .
Year.
Net Cash Flow ( £).
Cumulative cash flow ( £).
1.
22,000.
22,000.
2.
31,000.
(22,000+31,000)=53,000.
3.
43,000.
(53,000+43,000)=96,000.
4.
52,000.
(96,000+52,000)=148,000.
5.
71,000.
(148,000+71,000)=219,000.
Payback period of project A =3 (years) + .
=3.56 years.
II/ Payback period of project B:.
