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MBA PROGRAMME
Coursework Assignment
STRATEGIC FINANCIAL MANAGEMENT (SFM)

Submitted to
DR. S A PALAN

Submitted by
STUDENT NUMBER:

JUNE 2010

*

TABLE OF CONTENT
MBA PROGRAMME SFM ASSIGNMENT 3
1. INVESTMENT APPRAISAL SHOULD ADD VALUE TO THE BUSINESS ENTITY. DO YOU AGREE? 3
2. CALCULATE EACH PROJECT´S PAYBACK PERIOD, NPV , AND IRR 3
2.1. PAYBACK PERIOD 3
2.2. NPV(NET PRESENT VALUE) 5
2.3. IRR (INTERNAL RATE OF RETURN) 7
3. FOR EACH OF THE ABOVE METHODS WHICH PROJECT SHOULD BE SELECTED AND EXPLAIN WHY? 9
3.1. METHOD OF PAYBACK PERIOD 9
3.2. NPV (NET PRESENT VALUE) 9
3.3. IRR (INTERNAL RATE OF RETURN) 10
4. EXPLAIN WHY IT IS ESSENTIAL THAT DISCOUNTED CASH FLOWS SHOULD BE CALCULATED WHEN MAKING LONG TERM INVESTMENT DECISIONS. 10
5. WHAT WOULDHAPPEN TO THE NPV IF: 11
6. EXPLAIN WHY THE NPV OF A RELATIVELY LONG TERM PROJECT IS MORE SENSITIVE TO CHANGES IN THE COST OF CAPITAL THAN THE NPV OF A SHORT TERM PROJECT? 13
7. HOW DOES A CHANGE IN THE COST OF CAPITAL AFFECT THE PROJECT’S IRR? 13
8. COMPARE THE EFFECTIVENESS OF THE NPV METHOD WITH THAT OF THE IRR METHOD 14
9. REFERENCES 16
10. BIBLIOGRAPHY 17

* MBA PROGRAMME SFMASSIGNMENT
1. INVESTMENT APPRAISAL SHOULD ADD VALUE TO THE BUSINESS ENTITY. DO YOU AGREE?

I agree that investment appraisal adds value to the business entity, because an analysis that anticipates the future can avoid possible obstacles and long term problems. When companies have to invest, they have to make the best decision. It will help to determine the profitability of the investment project todecide whether or not to carry it out, and also, when they have a list of investment alternatives, they can be ordered from high to low profitability, in order to prioritise the most profitable. Through investment appraisal, companies are able to identify the best way to achieve their target to ensure that the investment project will have a successful outcome.
2. CALCULATE EACH PROJECT´SPAYBACK PERIOD, NPV , AND IRR

3.1. PAYBACK PERIOD

The payback period measures the length of time required to
recover the amount of initial investment. (Jae K Shim, 2009 ).

PAYBACK PROJECT A | | |
| | |
| | |
YEARS | PROJECT A | CUMULATIVE CASH FLOW |
| £0,00 | |
0 | -10 |   |
1 | 3 | 3 |
2 | 3 | 6 |
3 | 3 | 9 |
4 | 3 | 12 |
5 | 3 |  - |

PAYBACKPROJECT A =3 years and13
PAYBACK PROJECT A =3 years and0.3333
PAYBACK PROJECT A =3 years and0.33333 ×12
PAYBACK PROJECT A =3 years and 4 months

PAY BACK PROJECT B | | |
| | |
| | |
YEARS | PROJECT B | CUMULATIVE CASH FLOW |
| £0,00 | |
0 | -25 |   |
1 | 6,5 | 6,5 |
2 | 7,0 | 13,5 |
3 | 7,5 | 21,0 |
4 | 7,5 | 28,5 |
5 | 8,0 |  - |

PAYBACK PROJECT B =3 yearsand47,5
PAYBACK PROJECT B =3 years and0,5333
PAYBACK PROJECT B =3 years and0,5333 ×12
PAYBACK PROJECT B =3 years, 6 months and 4 days.

3.2. NPV (NET PRESENT VALUE)
“The Net Present Value, investment appraisal method works on the simple, but fundamental, principle that an investment is worthwhile undertaking if the money got out of the investment is at least equal to- if not greaterthan money put in.” The Net Present Value (NPV) is the most popular method of assessing the projects long-term investment. Net Present Value, to determine whether an investment complies with the basic objective financial: to maximise investment (Lumby, 1988).

YEARS | PROJECT A | PROJECT B |
| £0,00 | £0,00 |
0 | -10 | -25 |
1 | 3 | 6,5 |
2 | 3 | 7,0 |
3 | 3 | 7,5 |
4 | 3 | 7,5 |5 | 3 | 8,0 |



NPV=Ft1+it
Where:
N = is number of periods until payment
R = is Discount rate.

* NPV PROJECT A
=-10+31+0.1251+31+0.1252+31+0.1253+31+0.1254+31+0.1255

NPV PROJECT A=-10(+ 2.6667 +2.3704 + 2.1070 +1.8729 + 1.6648)
NPV PROJECT A= -10+10.6817
NPV PROJECT A= 0,6817

* NPV PROJECT B
=-25+6,51+0.1251+7,01+0.1252+7,51+0.1253+7,51+0.1254+8,01+0.1255...