Investment Appraisal – Techniques of PP, ARR, NPV, IRR and Discounted PP

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Assignment Details:-

• Subject: Investment Appraisal
• Words: 1000

 

Tesco Marketing Ltd is using an Ansoff marketing matrix as a framework for deciding upon its potential strategies for future growth.

 

A series of Ansoff growth strategies can set the direction for the company‘s strategy such as market penetration (project A), market development (project B), product development (project C) and diversification (project D).

 

At present, the company is not willing to consider project C (product development) and D (diversification strategy) owing to the risks involved in manufacturing, launching and marketing new products.

 

Following market and financial research conducted by the company, the expected cash flows of two marketing projects (A and B) for the next ten years are provided in the table below.

 

As the accounting consultant of Tesco Marketing Ltd, you are required to provide critical advice to a client on the best investment decision, on whether to invest in marketing projects A or B.

 

In order to maximize the investment return to your client, you are required to employ five main investment appraisal techniques such as the techniques of PP (Payback Period), ARR (Accounting Rate of Return), NPV (Net Present Value), IRR (Internal Rate of Return) and Discounted PP.

 

With the prevailing interest rate in the lending and borrowing markets, as a professional accountant, you consider that the cost of capital (r or i) at present is 5 per cent.

 

Period	Project A (£)	Project B (£)
Year 0	(500)	(500)
Year 1	70	100
Year 2	80	0
Year 3	90	400
Year 4	100	0
Year 5	110	100
Year 6	120	200
Year 7	130	0
Year 8	140	100
Year 9	150	0
Year 10	150	300

 

Required Tasks:

1. You are required to calculate the PP, ARR, NPV, IRR and Discounted PP of each project. (50%)
2. Discuss the detailed advantages (strengths) and disadvantages (weaknesses) of each method of investment appraisal techniques. (30%)
3. You are required to comment on the stability of the projects. (10%)
4. Show the ranking of the projects using all the above criteria, and as a professional accountant, critically advise your client on the best investment action, on whether to invest in project A or B. (10%)

(Total 100%)