FIN1FOF Fundamental Of Finance

The overall assessment mainly aims in understanding the significance of investment appraisal techniques and how it might help in detecting the financial viability of an investment opportunity. In addition, the assessment also evaluates the proposal made by the trainee of Hoodoo Inc, where the mistakes made by the young trainees is checked and new project valuation is conducted. In addition, the valuation of the cost of capital is also discussed in the assessment, which helps in depicted the discounting rate, which is taken into consideration in the investment appraisal techniques. Moreover, the amendments on the assumption of the project is relevantly evaluated in the assessment, which could help in depicting the level expenses that might incur during 5-year time span. In addition, different level of appraisal techniques such as Net Present Value, Internal Rate of Return and Payback Period is relevantly calculated in the assessment to understand the financial viability of the project proposed and amended for Hoodoo Inc.

The relevant analytical comments are mainly conducted on variable assessment of the project, which helps in detecting the sensitive valuation of different components. The major sensitive component of the project is mainly considered as selling price of the machine, initial capital investment required by the project and cost of capital of the organisation. The estimation of the selling price is relevantly different, as the anticipation of the selling price for the machine after 5 years. The salvage value of the machine is mainly anticipated at the levels of $6 million, which can only alter slightly from the anticipation, as resale value of the machine is relevantly high. Therefore, the change in the current valuation of the machine can alter the overall cash inflow of the company during the ending period but cannot anticipate the actual value. On the other hand, Lerer and McGarrigle (2018) criticises that the valuation of the asset might reduce due to the market value and the actual demand for the used machines in the current market.

The second sensitive information that could be identified from the evaluation is the initial capital investment required by the project, as the working capital is conducted to a be percentage of the sales conducted by the company over the period of 1 year. This anticipation of the demand is a variable factor for the project, which significantly changes with the alternation in demand for the project. In this context, Shehu (2015) stated that anticipation of the demand is relevantly essential for the organisation to understand the level of production that is needed during the fiscal year for reducing the blockage of essential capital and increasing their cash position. The last components that is considered to be sensitive is the cost of capital anticipated for the project, which helps in deriving the net present value of the project. However, cost of capital for the project is not sensitive, as the data is calculated on the basis of the current WACC of the company. Hence, slight alternation in the cost of capital value is conducted due to the changes in the current share price of the organisation.

After the evaluation of the overall variables of the project intimal investment capital is considered to be most sensitive, as changes in demand for the project will directly alter the working capital requirements and the initial investment that will be conducted by the company over the period of time. The changes in value of demand will directly affect cash flow of the project and spike the initiation of adequate decision that needs to be conducted by the company. According to Baum and Crosby (2014), demand for particular project is an essential measurement factor, which allows organisation to understand the significance of the project in generating higher returns from investment.

The above table mainly helps in depicting the level of WACC, which could be used during the calculation of the Net Present Value. The calculation of WACC mainly indicates the minimum return that is needed by the investors from the operations of the company. Hence, the project that is selected by the company needs to have return higher than the WACC value, as it will increase firm value in future. The above calculated cost of capital is relatively adequate, as it is delivered from the information presented about the company. Using the appropriate cost of capital is essential for the organisation, as it helps in depicting the accurate level of net present value calculated for the project. The alteration in the calculation of WACC has changed the cost of capital value for the project, which helped the company to unravel the significance and opportunities of the project that could generate high level of returns from investment. 

The above figure depicts the calculation of Weighted Average Cost of Capital, which is used in detecting the appropriate cost of capital for the organisation. In addition, the calculation of WACC is mainly implemented in each project for detecting its viability and how it might help in generating high level of returns from investment. The calculation of WACC relevantly helped in detecting the level of cost, which needs to be maintained by the company over the period of time. In this context, Baker and Wurgler (2015) mentioned that with the help of cost of capital companies are mainly able to understand the significance of the project and how much return it might provide over the period of time. On the other hand, Frank and Shen (2016) criticise that the calculation of WACC needs to be conducted with precision and any alternation will result in the wrong calculation of WACC and might hamper negative impact on projects valuation.  

From the overall evaluation of the above calculation relevant alteration and amended to the proposal is mainly conducted, as the trainee was not able to adhere all the relevant calculations accurately. In addition, the calculation of overhead was not calculated adequately by the trainee, where the values were higher than the actual valuation needed for the project. Therefore, relevant amendments on the overhead part of the project was conducted, which declined the value of cash outflow for the project. The wrong assumption made by the trainee mainly increased the cash outflow and reduce the cash inflow of the project at the end of each year. Amending the values has relatively helped in understanding the extra income that will be generated from the proposal. Moreover, changes in the taxable income of the project is seen, as the overall projects expenses and cash outflow declined. This relevantly increased taxable income of the project and changed values of net cash inflow for the project. The changes in tax amount is also seen, where the overall taxes have been incurred during year 2016, which was preciously not possible in proposal made by the Trainee, as the profits were zero (Harris 2017).

In addition, there were amendments in working capital calculation, as the actual value of sales were not considered by the trainee, while including in the calculation. This mainly increased the initial capital requirement for the project, while reducing the chance of NPV value of the project. This relevantly indicated that the assumptions made by the trainee was not adequate, which extensively increased cash outflow of the project and minimised the cash inflows. The working capital requirements that was needed as the initial investment capital was to be returned at the end of the project life, which was also not conducted by the trainee for the proposed project. This relevantly reduced the cash inflow of the project and led the NPV into the negative frontier. Furthermore, the trainee did not accommodate the salvage value of the equipment at the end of the project life, which relevantly reduced the overall cash inflows of the proposed project (Li and Trutnevyte 2017). Hence, the wrong anticipation of the cash outflows conducted by the proposed project was the main reason behind the negative NPV calculation conducted by the Trainee.

From the overall calculation that is conducted by the Trines was wrong, which is indicated that the overall NPV value was negative $(11,461,051.91). Hence, the alternation conducted on the proposed project mainly helped in depicting the level of income and cash inflows that will be conducted by the project during the investment period of 5 years. The amended calculation relevantly changed NPV value to positive $ 9,528,671.34, which indicated the financial viability of the project and how the proposed project could generate higher rate of return from investment in near future. Hence, the investment appraisal techniques used by the company indicated the positive attributes of the proposed investment, which could help in improving the return from investment and increase firm value in future (Warren and Seal 2018).

The above table indicates the overall investment appraisal techniques, which has been used by the company in detecting the financial viability of the project. In addition, the financial terms mainly help in understanding the significance of the project and how it could improve the returns from investment over the period of investment. the investment appraisal techniques used in the valuation of the project have certain advantages and disadvantages, which needs to be evaluated to understand the significance of the techniques delivering the accurate value of and assumptions of the project. This first appraisal techniques used in the assessment is the calculation of Net present value, which needs certain assumptions from the project for deriving the accurate financial viability of the project (Bader, Al-Nawaiseh and Nawaiseh 2018).

The Net Present Valuation relevantly has significance and limitation, which can indicated the use of investment appraisal techniques in maximising the level of returns from investments. The relevant limitations of the Net Present Value technique are that it cannot accommodate or compare projects with different timeline. This limitation does not allow the organisation to understand the actual significance of the project with different level of tenure. Moreover, NPV also uses discounting rate, which needs to be evaluated to understand the significance and return generation capability of the project. Furthermore, NPV is also not able to compare projects with different sizes to understand the investment opportunity, which could generate higher rate of return from investment. Hence, the above identified disadvantage might not allow the organisation to detect the significance of the investment appraisal technique (Lokman et al. 2017).

However, there are certain significance of Net Present Value, which allows the organisation in determining viability of the returns provided by the project. In addition, NPV techniques gives importance to time value of money and detect the discounted values of cash inflow and outflows. Moreover, NPV calculation evaluates the probability of risk and profitability, which a project could endure during its time frame. Furthermore, the NPV calculation relevantly detects the overall firm value, which will be increased over the period of time after the compeltion of the project. Hence, NPV calculation relevantly allows the organisation in determining the actual value of the project and how it could increase cash inflow in near future (Higham, Fortune and Boothman 2016).

In addition, the second investment appraisal technique used in the assessment is the calculation of internal rate of return, which has both significance and limitation attached to its usage. Moreover, the calculation Internal Rate of Return is complex and can only be conducted by qualified individuals. Hence, the IRR is only used by managers, to determine the rate of return, which the project will provide after completion of the project. However, the major significance of IRR is its capability to determine the actual time value of money. Moreover, the IRR technique also helps in determining uniform ranking of the project on the basis of the return it could generate over time. Hence, organisation with the help of IRR is able to understand the level of returns, which could be generated from investment over the period of time (Throsby 2016).

The last investment appraisal technique that could be used for the evaluation is payback period, which helps in understanding the capability of the project to return the investment capital within the stipulated time of the project. However, the major limitation of the techniques is its lack of accommodating the measure of the time value for money. However, the value derived from the payback period can be used by the company to understand the significance of the project and its capability to return the invested capital within the stipulated time frame of the project (Kolawole 2016).

Hence, from the evaluation of the proposed project it could be identified that NPV of the project is determined to be positive and at the level of 9,528,671.34. In addition, the IRR is calculated at the level of 15%, which is higher than the actual cost of capital for the project. This relevantly indicates the financial viability of the project in providing higher return from investment over the period of time. Lastly, the overall payback period is within the tenure of the project and is valued at 4 years. Henceforth, the invested capital of the project will be accumulated with 4 years, which is relevantly less than the 5-year level of the project. Therefore, Hoodoo plc can ignore the valuation conducted by the Trainee, which was actually indicating the loss that will be generated from the proposed project. The decision made by Chief Executive Officer of Hoodoo plc was relevantly accurate, as it helped in understanding the actual financial progress of the proposed investment.

Therefore, with the evaluation of the proposed project on different fronts has helped in understanding the level of returns, which could be generated from the investment. In addition, the evaluation of the investment appraisal technique has mainly helped in understanding the level of return, which could be provided form the investment. The calculation directly indicates that the project is able to provide positive NPV, where the IRR is higher than the cost of capital and the payback period is within the time frame of the project. The investment project was previously indicated a negative value of the NPV, which resulted in the rejection of the project. However, the alternation and depiction of actual values has helped in improving the level of returns, which could be generated from investment.

The revised calculation conducted on the proposal has relevantly helped in changing the overall valuation of the project. The previous calculation conducted by the trainee was not adequate, where the actual valuation of the project was not being represented. Hence, after the calculation has the The revised calculation conducted on the proposal has relevantly helped in changing the overall valuation of the project. The previous calculation conducted by the trainee was not adequate for the project and the financial viability was presented, where the NPV became positive, while the IRR valued at 15% and payback period at 4 years. The amended valuation on the proposed project is relevantly discussed, as the trainee was not able to calculate certain income and expenses correctly for project and increased the cash outflows, which led to the negative NPV value for the project. The significance and limitations of the investment appraisal techniques mainly indicated the use of NPV, IRR and payback period, which could be used by the company in evaluating different projects. Hence, the project can be implemented by Hoodoo plc, which in turn might improve the level of profits and raise the level of firm value in near future. 

Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP procurement success in large green projects. Procedia-Social and Behavioral Sciences, 119, pp.847-856.

Awojobi, O. and Jenkins, G.P., 2016. Managing the cost overrun risks of hydroelectric dams: An application of reference class forecasting techniques. Renewable and Sustainable Energy Reviews, 63, pp.19-32.

Bader, A., Al-Nawaiseh, H.N. and Nawaiseh, M.E., 2018. Capital Investment Appraisal Practices of Jordan Industrial Companies: A Survey of Current Usage. International Research Journal of Applied Finance, 9(4), pp.146-161.

Baker, M. and Wurgler, J., 2015. Do strict capital requirements raise the cost of capital? Bank regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5), pp.315-20.

Bas, G. and Van der Lei, T.E., 2015. Dynamic investment appraisal: Economic analysis of mobile production concepts in the process industry. In Computer Aided Chemical Engineering (Vol. 37, pp. 245-250). Elsevier.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

Bennett, M. and James, P., 2017. The Green bottom line: environmental accounting for management: current practice and future trends. Routledge.

Brisley, R., Wylde, R., Lamb, R., Cooper, J., Sayers, P. and Hall, J., 2016. Techniques for valuing adaptive capacity in flood risk management. Proceedings of the ICE-Water Management, 169(2), pp.75-84.

DeBoeuf, D., Lee, H., Johnson, D. and Masharuev, M., 2018. Purchasing power return, a new paradigm of capital investment appraisal. Managerial Finance, 44(2), pp.241-256.

Elmassri, M.M., Harris, E.P. and Carter, D.B., 2016. Accounting for strategic investment decision-making under extreme uncertainty. The British Accounting Review, 48(2), pp.151-168.

Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), pp.300-315.

Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN.

Harris, E., 2017. Strategic project risk appraisal and management. Routledge.

Higham, A.P., Fortune, C. and Boothman, J.C., 2016. Sustainability and investment appraisal for housing regeneration projects. Structural Survey, 34(2), pp.150-167.

Jorge-Calderón, D., 2016. Aviation investment: Economic appraisal for airports, air traffic management, airlines and aeronautics. Routledge.

Kolawole, O.A., 2016. Assessment of the Reliability of Techniques Employed in Feasibility and Viability Appraisal. Assessment, 7(15).

Lerer, M. and McGarrigle, C., 2018. Insurgent Finances: An Interview with Gabriela Ceja and Fran Ilich. Visual Resources, 34(1-2), pp.168-177.

Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal pathways for the UK electricity sector transition to 2050. Applied energy, 189, pp.89-109.

Lokman, S., Volker, D., Zijlstra-Vlasveld, M.C., Brouwers, E.P., Boon, B., Beekman, A.T., Smit, F. and Van der Feltz-Cornelis, C.M., 2017. Return-to-work intervention versus usual care for sick-listed employees: health-economic investment appraisal alongside a cluster randomised trial. BMJ open, 7(10), p.e016348.

Ortiz-Molina, H. and Phillips, G.M., 2014. Real asset illiquidity and the cost of capital. Journal of Financial and Quantitative Analysis, 49(1), pp.1-32.

Schwarzbichler, M., Steiner, C. and Turnheim, D., 2018. WACCs and Hurdle Rate. In Financial Steering (pp. 21-37). Springer, Cham.

Shehu, Y.J., 2015. PUBLIC FINANCES–THE CASE OF KOSOVO. European Journal of Business, Economics and Accountancy, 3(4), pp.29-34.

Throsby, D., 2016. Investment in urban heritage conservation in developing countries: Concepts, methods and data. City, Culture and Society, 7(2), pp.81-86.

Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: the cultural political economy of electricity generation. Accounting, Organizations and Society.