Finance production and profit

(a) By using available information, calculate the net present value and advise that company should undertake this investment or not

Net present value ( NPV): It is the capital budgeting method which is used to calculate the present value of the cash inflow. Basically, NPV is the difference of cash inflow and cash outflow from the period of time (Agyei, Hansen and Acheampong, 2018). It is used to calculate for the investment planning and further analysed that invested project is profitable for the company or not.

From the above calculation, it has been observed that Net Present Value ( NPV) of the Boat Plc is £ 265227559. It means company able to generate profit and this investment is beneficial for the organizations. Boat Plc should undertake this project or maximise the efficiency as well as effectiveness of the business operations.

Working Notes:

Income Statement:

* Direct material

Cost of Sitax:

Cost of Zilon:

* Direct Labour:

* Tax Calculation:

* Further calculated half tax will be payable in the current year in which it arises and the balance is paid in the next year.

(b) Identify other factors which help the company to evaluate their decisions

Investment appraisal technique is the most appropriate method which help the organizations to identify those factors which is actually helpful for them to make their investment decisions (Christophers, 2018). Some of the factors are discussed below:

Payback period: It is also one of the capital budgeting method which is used to calculate in order to identify that in how much time required to recover company's initial investment. Lower the payback period is beneficial for the business and in the comparative projects, company select the investment project which has lower payback period.

Accounting rate of return ( ARR ): It is the financial ratio which help the organization to evaluate the overall return from the investment. Accounting rate of return used in the capital budgeting ans exclude the time value of money (Dörry, 2016). Higher the ARR is beneficial for the company and management select that particular investment which provide higher return in comparison to others.

Below mention calculation shows the other factors which help in analysing that Boat Plc should undertake this project or not.

Payback Period = Year before amount fully recover + ( {Initial Investment – Recovered cost } / Cash flow during the year )

= 1 + ( 200000000 - 110526552 ) / 175608599

= 1 + { 89473448 / 175608599 }

= 1 + 0.509504936

= 1.509504936 or 1.5 year.

Accounting Rate of Return (ARR) = { Total net profit / No of year } / Initial Cost * 100

= { 787260663 / 5 } / 200000000 *100

= 157452132.6 / 2000000000 * 100

= 0.787260663 *100

= 78.7260663 or 78.72 %

From the above calculation, it has been analysed that Payback period of this investment is 1.5 year that is quit good. It means company able to recover their investment amount in the 1.5 year and further generate cash is the profit of the company. This project beneficial for the organization (Nie and et. al., 2016). Another factor which influence the decision of Boat Plc is Accounting Rate of Return (ARR) that is 78.72%. It means company generate huge return through investing in this particular project.

PART 2

1. How Risk may be incorporated in business investment decision-making process:

There are various types of risk which associated with the current investment and management need to analyse those risk and prepare solutions for it. Some factors are mentioned below which increases the riskiness of capital budgeting project.

Project specific risk: Every project associated with the various activities risk where employees are the main factor who pursuing the entire project. Management of Boat Plc unable to predict the accurate cash flow of project. Boat plc evaluate the most expensive material from their anticipation and ensure that actual value can be less than this but not more than. But sometimes all the estimation goes wrong and fail the project.

Industry specific risk: Change in the industry regulations can impact the overall project estimation and it further become risk for the company. So management need to formulate strategies in order to minimise this risk (Usman and Tasmin, 2016). Change in the government regulations may increase the overall cost which associated with the business operations. For example: Boat Plc invest in a new equipment but their competitors already have the same one but it costs is less than yours than it will affect the entire strategy and give financial disadvantage.

Market risk: It include the various external factors such as political, social, technological etc. Before making decision for investment project, company should analyse the entire market and evaluate that how these factors affect the project. In addition, change in the interest rate, economic growth etc. These factor arises the risk which impact the investment projects and generate the unfavourable condition for the organizations.

Above mention risk affect the business, so before taking any investment related decision company should analyse all the factors and than take further decisions accordingly.

CONCLUSION

From the overall evaluation, it has been concluded that investment appraisal techniques help the organization measure the profitability of an investment, which is crucial to analyze. Since project failure can lead to significant monetary loss, management should use these techniques to minimize the risk of failure and ensure the selected project benefits the business. Utilizing methods such as net present value (NPV), accounting rate of return (ARR), and payback period helps management make informed investment decisions and formulate strategies accordingly. A lower payback period and higher accounting return are profitable for the business, while a positive NPV indicates that the project is beneficial for the company. For those using an essay typer or seeking assignment help UK, this analysis provides valuable insights into effective investment evaluation and decision-making.

Also Read Sample on- Unit 4 Financial Accounting Principle BTEC Level 4 HND in Business

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