Investment Appraisal Techniques And Share Price Analysis Essay For Riverlea.

Furthermore, the CEO suggests conducting sensitivity analysis as follows because of uncertainty in relation to some of the expected cash flows:

1) Allow for a probability that incremental revenues associated with the supply of private label confectionery would be 40% lower than expected starting from year six;

2) Allow for a probability that incremental revenues associated with the supply of private label confectionery would be 20% higher than expected starting from year six.

You are to prepare spreadsheets, to present to the CEO, showing the various cash flows based on the different scenarios; assuming that the company decides to proceed with the supply of private label confectionery to Wowcoles.

Use Excel to prepare a full analysis, evaluating whether or not the company should proceed with the supply of private label confectionery to Wowcoles, taking into consideration the various scenarios

Plot the stock price of Riverlea 5 days before and after the announcement. Discuss the stock price behaviour of Riverlea before, during and after the announcement and justify whether the stock price reaction is consistent with semi-strong form market efficiency. Your response should also include recommendations to exploit mispricing opportunities, if any, from the perspective of the company and expectations of what would happen to the share price subsequent to the analysed event window.

Based on the analysis conducted in Part 1, evaluate the extent to which stock price is expected to increase or decrease on the day of the announcement.

1. Ease of reading spread sheet
2. Use of formulae in spread sheet
3. Correct application of theoretical model

1. Statement of assumptions
2. Correct recommendation based on analyses
3. Coherence of arguments
4. Presentation, grammatical structure, referencing, etc.

Conducting Sensitivity Analysis Using Excel

The relevant evaluation of investment options is mainly conducted to understand the financial outcome, which could be provided from production of confectionaries. There are different types of scenarios, which could be conducted for determining the overall viability of the investment option. Relevant scenarios could be conducted for deriving the financial stability and feasibility of the production of confectionaries.

The above figure mainly represents the overall discounting rate, which could be used in deriving the NPV valuation of the project. This NPV valuation could mainly help in getting the overall financial stability of the project. Furthermore, derivation of the cost of capital could mainly be conducted with the help of CAPM formula, where with the use of adequate beta, market premium and risk free rate could directly help in detecting the cost of capital. Locatelli, Invernizzi, and Mancini (2016) mentioned that use of adequate discounting rate companies are mainly able to compensate for the inflation rate, which could hamper profitability of the organisation. 

The valuation of normal condition scenario could mainly help in representing the overall profitability, which might be generated by Riverlea from the project. Moreover, the valuation of NPV is mainly at $948,392, while the IRR is at 21.49% with a payback period of 4.6 years and discounted payback period of 6.5 years. Furthermore, the overall investment appraisal techniques mainly represents that the financial valuation of the project is viable, which could provide higher returns from investment. The overall cash flow mainly represents positive expenses, which could directly help in generating their revenue from investment. Throsby (2016) mentioned that investment appraisal techniques such as internal rate of return allow the organization to detect minimum return, which could be provided by the investment.

The overall financial stability of the investment option can be identified with the help of above calculation, which represents the low revenue scenario, which is generated by the company. The NPV of the company is mainly identified at $729,865, where the overall chance of revenue of decline is 40%. The overall payback period is mainly detected 4.6 years, while the discounted payback period is 6.8 years and internal rate of return is 19.75%. The investment appraisal techniques mainly represent the overall financial stability of the investment, which might help in generating overall profits from investment (Higham, Fortune and Boothman 2016). Therefore, it could be depicted that under adverse circumstances the investment is provide a positive return for the company with the positive NPV value.

Financial Valuation of the Project

The overall above figure mainly represent the calculation of the investment scope provided to Riverlea under positive circumstances. This situation mainly indicates that there is a 10% probability that the overall revenue of the company will rise by 20%. Therefore, the situation mainly represents that investment appraisal techniques such as NPV, IRR, payback period and discounted payback period could be used in evaluating the overall viability of the project (Bai, Dhavale and Sarkis 2016). The positive sensation mainly indicates that NPV is $975,708, IRR is 21.69%, payback period is 4.6 years, and discounted payback is 6.4 years. The overall valuation of the investment appraisal techniques mainly use in generating higher revenue from investment.

 From the overall evaluation of the investment opportunity, which is presented to Riverlea is a viable approach. In addition, the overall investment analysis is mainly conducted on different scenarios, where the range of income that could be presented from investment is depicted. The investment appraisal techniques mainly represent the overall financial stability of the new project, which could increase firm value in future. Therefore, it is advisable to Riverlea to commence with the production of confectionaries in their production function.

The relevant evaluation is mainly conducted on the share price movement of Riverlea after the announcement of extra income that will be generated in near future. In addition, the overall valuation could mainly indicate overall impact of the announcement, which is conducted on the share price of the company. Relevant calculation is mainly conducted to detect the probability of the share price value after the announcement.

The overall calculation mainly represents the impact on the share price of Riverlea after the announcement of increased income in future from the project. In addition, the overall valuation could also help in detecting the actual valuation of the share price. From the day -1 to day 0 relevant increment of 101% in share value could be witnessed, which directly indicates that the company’s shares are affected by strong market efficiency. Furthermore, the company’s overall share price movement was relevantly higher than the anticipated share price hike. This mainly indicates that the investor’s expectations have directly reflected in the share price hike. The share price has directly increased from 2.16 to 4.35, whereas the actual share price that is estimated from the calculation mainly ranges from $2.89 to $3.14. The overall valuation of the share price also indicates that relevant increment in share price was witnessed from day -2 to day -1. This indicates that the announcement news was leaked, which resulted in increment of share price by 80%. Narayan, Liu and Westerlund (2016) mentioned that with the help of adequate efficient market hypotheses condition investors are able to detect quickly all the relevant information provided by the company.

From the evaluation of the share price movement of Riverlea, the company could adopt adequate short selling strategy. This relevant short selling strategy could mainly help in generating the return from investment after shorting the stock at day 0, where the stock price high was 4.35. The relevant selling of the share from 4.35 could provide a relevant return of 27.91% from investment. Hence, investor to use the short selling strategy for adequately increasing profitability from the inflated share price.

Therefore, from the evaluation it could be identified that shares of Riverlea is directly affected by strong market efficiency. In addition, share price movement after the announcement mainly indicates that the share price of the company adequately reflected to the news. The overall investment strategy such as short selling could be conducted by the organisation for generating higher revenue from investment (Ferreira and Dionísio 2016).

Reference

Ausloos, M., Jovanovic, F. and Schinckus, C., 2016. On the “usual” misunderstandings between econophysics and finance: Some clarifications on modelling approaches and efficient market hypothesis. International Review of Financial Analysis, 47, pp.7-14.

Ausloos, M., Jovanovic, F. and Schinckus, C., 2016. On the “usual” misunderstandings between econophysics and finance: Some clarifications on modelling approaches and efficient market hypothesis. International Review of Financial Analysis, 47, pp.7-14.

Bai, C., Dhavale, D. and Sarkis, J., 2016. Complex investment decisions using rough set and fuzzy c-means: an example of investment in green supply chains. European journal of operational research, 248(2), pp.507-521.

Caporale, G.M., Gil-Alana, L., Plastun, A. and Makarenko, I., 2016. Long memory in the Ukrainian stock market and financial crises. Journal of Economics and Finance, 40(2), pp.235-257.

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.

Ferreira, P. and Dionísio, A., 2016. How long is the memory of the US stock market?. Physica A: Statistical Mechanics and its Applications, 451, pp.502-506.

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.

Locatelli, G., Invernizzi, D.C. and Mancini, M., 2016. Investment and risk appraisal in energy storage systems: A real options approach. Energy, 104, pp.114-131.

Narayan, P.K., Liu, R. and Westerlund, J., 2016. A GARCH model for testing market efficiency. Journal of International Financial Markets, Institutions and Money, 41, pp.121-138.

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