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Executive Report for Peaches plc.  -about Strategic Option Choosing   Table of content   Calculation for Investment Appraisal Methods                            3 1.1 Accounting Rate of Return                                          6   Payback Period                                                   7 Net Present Value                                                 8 1.4 Internal Rate of Return                                             9   Recommendations                                                 12 Reference                                                           17   Appendix 1                                                         18   Appendix 2                                                         19


Calculation for Investment Appraisal Method To decide which option is more suitable for Peaches plc’s development, it concerned to using variety investment appraisal methods to evaluate each project. This report will demonstrate four appraisal methods: accounting rate of return (ARR), payback period, net present value (NPV) and internal rate of return (IRR) to evaluate three options and present a suitable suggestion at the end. Initially, from table 1 to table 7 which are illustrate each option’s initial investment, profit/loss and cash flow. Specifically, table five is to calculate option 1B profit/loss based on adjust option 1A’s profit/loss.       Table 1: Initial Investment-Strategic Option 1A

 

£m

Patent

5

Additional manufacturing unit

2

High end manufacturing non-current assets

6

Land

3

Working capital

1.2

Total

17.2


Table 2: Cash Flow for Strategic Option 1A

Year

Profit/loss £m

Depreciation £m

Interest £m

Dispose land £m

Working capital £m

Cash flow £m

1

(2.3)

1.3

0.3

 

 

(0.7)

2

1.5

1.3

0.3

 

 

3.1

3

6

1.3

0.3

 

 

7.6

4

8

1.3

0.3

 

 

9.6

5

10

1.3

0.3

 

 

11.6

6

10

1.3

0.3

 

 

11.6

7

8

1.3

0.3

 

 

9.6

8

6

1.3

0.3

 

 

7.6

9

4

1.3

0.3

 

 

5.6

10

2

1.3

0.3

3

1.2

7.8

Total

53.2

 

 

 

 

 


Table 3: Initial Investment-Strategic Option 1B


£m

Patent

5

High end manufacturing non-current assets

6

Purchase manufacturing unit for lease

1.4

Working capital

1.2

Total

13.6



£m

Patent

5

Additional manufacturing unit

2

High end manufacturing non-current assets

6

Land

3

Working capital

1.2

Total

17.2

Table 4: Cash Flow for Strategic Option 1B

Year

Profit/loss £m

Depreciation £m

Lease payment £m

Working capital £m

Cash flow £m

1

(1.8)

1.1

(0.8)

 

(1.5)

2

2

1.1

(0.8)

 

2.3

3

6.5

1.1

(0.8)

 

6.8

4

8.5

1.1

(0.8)

 

8.8

5

10.5

1.1

(0.8)

 

10.8

6

10.5

1.1

(0.8)

 

10.8

7

8.5

1.1

(0.8)

 

8.8

8

6.5

1.1

(0.8)

 

6.8

9

4.5

1.1

(0.8)

 

4.8

10

2.5

1.1

(0.8)

1.2

4

Total

58.2

 

 

 

 


Table 5: Adjustment to 1B’s profit from 1A’s profit

Year

Profit/loss-1A £m

Depreciation £m

Interest £m

Profit/loss-1B £m

1

(2.3)

0.2

0.3

(1.8)

2

1.5

0.2

0.3

2

3

6

0.2

0.3

6.5

4

8

0.2

0.3

8.5

5

10

0.2

0.3

10.5

6

10

0.2

0.3

10.5

7

8

0.2

0.3

8.5

8

6

0.2

0.3

6.5

9

4

0.2

0.3

4.5

10

2

0.2

0.3

2.5


Table 6: Initial Investment-Strategic Option 1C


£m

Non-current manufacturing assets

4

Working capital

1.2

Total

5.2


Table 7: Cash Flow for Strategic Option 1C

Year £m

Profit/loss £m

Depreciation £m

Working capital £m

Cash flow £m

1

2.1

0.4

 

2.5

2

3.6

0.4

 

4

3

3.6

0.4

 

4

4

3.6

0.4

 

4

5

2.6

0.4

 

3

6

2.6

0.4

 

3

7

2.6

0.4

 

3

8

1.6

0.4

 

2

9

1.6

0.4

 

2

10

0.6

0.4

1.2

2.2

Total

24.5

 

 

 


1.1 Accounting Rate of Return   The first appraisal method is accounting rate of return (ARR) which can be defined as:  (Watson and Head, 2007). It takes the average accounting operating profit that the investment will generate and expresses it as a percentage of the average investment made over the like of project (Mclaney and Atrill, 2012). Here is table eight for three option’s ARR.       Table 8: Calculation of ARR for Three Options

Cash flows

Strategic Option 1A £m

Strategic Option 1B £m

Strategic Option 1C £m

Outlay

17.2

13.6

5.2

Year 1

(2.3)

(1.8)

2.5

Year 2

1.5

2

4

Year 3

6

6.5

4

Year 4

8

8.5

4

Year 5

10

10.5

3

Year 6

10

10.5

3

Year 7

8

8.5

3

Year 8

6

6.5

2

Year 9

4

4.5

2

Year 10

2

2.5

2.2

Total profit

53.2

58.2

24.5

Average annual profit

5.32

5.82

2.45

Accounting rate of return

30.93%

42.79%

47.12%


1.2 Payback Period   Secondly, to calculate the payback period it means measures the number of years it takes to recover the original investment from estimates of the yearly cash flows over its whole life (Mott, 1997). Table behind present the cash flow which have been adjusted and calculate the payback period at the end for three options.       Table 9: Calculation of Payback Period for Three Options

Cash flows

Strategic Option 1A £m

Strategic Option 1B £m

Strategic Option 1C £m

Outlay

17.2

13.6

5.2

Net cash flows

 

 

 

Year 1

(0.7)

(1.5)

2.5

Year 2

3.1

2.3

4

Year 3

7.6

6.8

4

Year 4

9.6

8.8

4

Year 5

11.6

10.8

3

Year 6

11.6

10.8

3

Year 7

9.6

8.8

3

Year 8

7.6

6.8

2

Year 9

5.6

4.8

2

Year 10

7.8

4

2.2

Payback period

3.75 years

3.68 years

1.68 years

Workings

3+=3.75

3+=3.68

1+=1.68