226. evaluation of new product investment plan

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  • 1. 1 Evaluation of new product investment plan Table of Content 1 Introduction.......................................................................................................................... 2 2 Task 1................................................................................................................................... 3 2.1 Weighted Average Cost of Capital (WACC) ......................................................................3 2.2 The case study .....................................................................................................................3 2.2.1 The simple method.......................................................................................................4 2.2.2 Capital Asset Pricing Method (CAPM) .......................................................................4 2.2.3 Using WACC for investment appraisal........................................................................5 3 Task 2................................................................................................................................... 6 3.1 Investment appraisal techniques..........................................................................................6 3.1.1 Net present value (NPV) ..............................................................................................6 3.1.2 Internal rate of return (IRR) .........................................................................................7 3.1.3 Decision rules...............................................................................................................7 3.2 The case study .....................................................................................................................8 3.2.1 Related indicator ..........................................................................................................8
  • 2. 2 3.2.2 NPV and IRR calculations .........................................................................................10 3.2.3 Summary ....................................................................................................................11 4 Task 3................................................................................................................................. 11 5 Task 4................................................................................................................................. 12 6 Conclusion ......................................................................................................................... 13 Reference.................................................................................................................................. 14
  • 3. 3 1 Introduction Investment is among the most critical long-term determinations to any business venture. Investment plays the primary part in establishing the business venture (Adler, 2000). Characteristically investment comprises of employing financial resources to buy an equipment/ setting up or other property, which will later generate income to a corporation over time. There are the chance of fascinating development opportunities from investments in product development, research and development, experience and new markets. As well known as capital budgeting methods, investment appraisal methods are employed to evaluate if capital expense on a specific venture will become advantageous for the company or not. Such methods might be employed to assess ventures in the private as well as public sector corporations. Basing on comprehending hypothesises and practices in relation with corporate finance, this investigation will concentrate on the case study of Trenton Brewery, for the evaluation of its new product investment plan and its financing in objective of counselling the present value of the corporation. 2 Task 1 Estimate the “Weighted Average Cost of Capital” (WACC) for Trenton. (The process you adopt is more important than the final figure you arrive at so ensure you clearly explain the sources of your data, your assumptions and your calculations). Advise how the company might use this figure in its investment appraisal. 3 Task 2 Appraise the new product proposal using any techniques you think are appropriate and make a clear recommendation as to whether the project should be accepted. Apply the company’s recommended discount rate of 12% in any discounted methods of appraisal. 4 Task 3 Advise the board on the wisdom of financing the new product with a long term loan. In your answer you should make clear the advantages and disadvantages of using long term debt as a source of finance. 5 Task 4 Advise the Trenton family whether to accept the cash offer for their shares.
  • 4. 4 6 Conclusion In this report, the related theories and practices of investment appraisal techniques have been reviewed. With relevant information provided in the case of Trendton, the following conclusions can be drown:  Estimations of WACC in the case of Trenton pursue the formerly investigations of the matter in the fact that the forecast values change as per the ways of verifying RE. With the range from 7% (CAPM) to 9.5% (simple approach basing on estimated RE provided by the venture capital corporation) and roughly 14% (Net Income Model, supposing no tax), the cost might become very important in investment proposal for Trenton, approving ventures with a rate of return more than WACC and refusing one with a less rate of return.  In case actual sales appears to be 20 per cent much more than forecast, Trenton might take up the venture; or else, it might just lead to a failure for the corporation, both at the estimated selling volume and less (if market becomes worse). Therefore, rejection of this new product investment is attentive.  If it is possible to receive the long term loan, Trenton will have much benefit, yet it is probable that it will become difficult for the firm to persuade banks; besides, its WACC will be influenced by such new loan, therefore upcoming ventures will have to hold more returns and upcoming investors will be showing more demand. Regarding the offer by VCC to purchase the 30 per cent of the share of the family, it is essential that they take in into consideration of other components, except for future dividend profits, thus the CFO might make the estimation which choice will help the family to achieve more. This document is provided by: VU Thuy Dung (Ms.) Manager Center for Online Writing Resources Facebook : https://www.facebook.com/vu.thuydung.5076 Email : assignmentsource@gmail.com Blogger : http://assignmentsource.blogspot.com/ Website : http://assignmentsource.com/
  • 5. 5 Reference Adler, R. W. (2000). Strategic investment decision appraisal techniques: the old and the new. Business Horizons, 43(6), 15-22. Akalu, M. M. (2003). The process of investment appraisal: the experience of 10 large British and Dutch companies. International Journal of Project Management, 21(5), 355-362. Al-Ajmi, J., Al-Saleh, N., & Hussain, H. A. (2011). Investment appraisal practices: A comparative study of conventional and Islamic financial institutions. Advances in Accounting, 27(1), 111-124. Block, S. (2011). Does the Weighted Average Cost of Capital Describe the Real-World Approach to the Discount Rate?. The Engineering Economist, 56(2), 170-180. Brealey, R. A., Myers, S. C., & Allen, F. (2006). Corporate finance (Vol. 8). Boston et al.: McGraw- Hill/Irwin. Chava, S., & Roberts, M. R. (2008). How does financing impact investment? The role of debt covenants. The Journal of Finance, 63(5), 2085-2121. Chrysafis, K. A. (2012). Corporate investment appraisal with possibilistic CAPM. Mathematical and Computer Modelling, 55(3), 1041-1050. Dayananda, D. (Ed.). (2002). Capital budgeting: financial appraisal of investment projects. Cambridge University Press. Kleemann, F. C. (2012). Investment Appraisal and Financial Analysis. GRIN Verlag. Pratt, S. P., & Grabowski, R. J. (2008). Cost of capital. John Wiley & Sons. Turner, S., & Morrell, P. (2003). An evaluation of airline beta values and their application in calculating the cost of equity capital. Journal of Air Transport Management, 9(4), 201-209.