Al Capital App

Steps in Capital Appraisal Nor

discounting
! Forecast investment in assets 1 ARR
(Accounting Rate
a) Determine the amount of of Return)
capital available 2
Payback method
3) Calculate the cost of capital
- Determine Cashflows from Accounting Rate of Returne
the project
5)Choose the best alternative Return on Capital Emp
6) Monitor the success of the

projects. Average annual profits x100

Aug Investment
Investment Appraisal

u
Orignal Cost +
ScrapValue
~

Discounting Non 2

Discounted
Does not
ignore
time value of Ignore
time value
money
of
money
How to convent cashflow to Payback Period :

profit ? & The

payback period of project
means the time in which

Annual Cashflow - Annual dep the

project would breakeven

Orignal Cost -
S .
v i e
.
it will return its initial
Estimated useful life investment back.

Payback
Advantages of ARR ~ ~

Easy to calculate Constant Uneven

2 Familian to Return on Cap Emp Cashflow cashflows.

Compares profitability of project

Orignal Cash outflow

Disadvantages of ARR : Constant Annual Cashflow

1 Ignores time value of Eg

money
.

2) Profit is subject to accounting Orignal cost - 100 , 000

assumptions Yearly Constant Cashflow > - 35000

3) Doesnot include risk of

late cashflow or bad debt . 100 000. = 2 86 years
.

35000 2 years 10montle

2 10monthsadays 14hrs
year
2 yes com days 14 his aumins
Example
Cost > 13 ,000
-

Advantages
Cash Flows Easy to calculate
40 6000 2
Based on cashflows
Y2 5000 3 Useful for businesses

43 Yor having liquidity issues

YU Your Y Helps in recovery of
Y5 3500 invested amount

Year CashFlow Net C. Flow Disadvantages

o (13000 (13000 ·
Only accounts for till

D
I Go

Jan
Loo, paybackperiode life expectancy
3 Yaro of project
Y 400 3 Ignores time value of
5 3500 money

2
years+
Last
negative X12
Next Positive

G G months
years
Time value of Advantages
money
① Inculcates time value

1 of money
Money loses its value over time

at a certain interest rate & Considers cashflows

10% ③ More objective then profits

100000 1 = 100 000 ,

100 0 0 .
985 = 98500 Disadvantages

① Discount factor is an estimate

Net Present Value : ② Difficult to understand for

1 This is the difference blu not non-finance people

cash

inflows and outflows of a business at aTakes estimates of cash inflows

certain discount rate

and outflows

Internal Rate of Return :

You Yo2 Yo3

Inflows * & & A discount rate where NPV = 0

Outflows

Net Cashflow Formula :

Towe
intrateHRR
XD F .

X
X X

P Value
.

-
= =

If tive accept
else reject
Advantages of IRR
① Recognizes time value of
money
① Based on cashflows
③ Companission with minimum

interest rate
&

Disadvantages
① Usually not
precise
② Difficult to calculate
③
Can not compare projects with

ranging lentghs.
 November 2011 PU3Q 3
.

Part (a) (Dood

O I 2345

Inflow 235 2585.

284 .
35 312 785160
.

23501 1 . 258531 1284 35011

.
. .

Outflow

DA
S
NPV- $203776
May 2017 132/0 .
6 Question 11 Tisha

0 > -
(125000
5 - 65500

1 - 5 -$1x10000 - 10000 Adj 1 and h

1 -
5-$2010000 - 160000) Adit and 3 - V .
2

1-5- Maint >

-

($500)
↓ - One-off Service fee 100

⑨ $

O & 2 345

Investment (125000

Scrap Value 65500

Revenue (Increase 10000 10000 10000 10000 10000

Variable Cost(Decrease) 20000 dow 20000 20000 2000

One off Suvice llos)

Maintenance cost (50000) 15000 (5000) (5000) (5000)
25000 20000 2000 2000 =90050
Ptb) Part (2)
-

Payback period Present valueof

Net
DF PV
10 %

0 (125600 ↓ (12500/
O (125000) (125000) I 24000 0 .
909 21816

I 24000 2
11010d 25000 0 826
. 20650

3
2 2500 176000) 25000 0 .
751 18775

3 2500 151800 Y 2500 0 683 . 17075

Y 25850 2600d j 90000 0 62155890

.

J Post You Net Present value & %

10
9206

4
(A I (e)
years R

Y
years 3 5 months
.
10 % + 120% - 10 % ) x 9206

9 206 -
1-24953)
10 % + 1 %% > 9206

34159

12 %
IRR /Internal Rate of Return)
y This is the interest rate at which NPV = 0

IRR 1
(dX)
= +

= Lower interest rate

D = The difference blu lowe and higher interest rate

= higher NPU

1 = lowe NPV

Eg Project -> Forecasted cost - $300 ,

00

Niv - 10 % NPU = Udo0

14% NPV- (1400)

>
-

Int rate + NPVL

June 2023/41/0 -

Pa100 . 000
1) >
- 500000045 % 2- 5000002593 - 500000020 %

4
- 500 , 000
x 10 %