Making Capital Investment Decisions †MyAssignmenthelp.com

Question: Discuss about the Making Capital Investment Decisions. Answer: Evaluating whether Jason should start TOYEE business: Option 1 Year Cash inflow Cumulative cash flow 0 $ (40,000) $ (40,000) 1 $ 8,500 $ (31,500) 2 $ 11,700 $ (19,800) 3 $ 15,950 $ (3,850) 4 $ 16,400 $ 12,550 5 $ 23,700 $ 36,250 Internal rate of return 21.79% Accountingrate of return (Average Income-Depreciation) / Average investment Accounting rate of return ($15,250 $6,300) / (($40,000-$8,500)/2) Accounting rate of return $8,950 / $15,750 Accounting rate of return 56.83% Payback period Year + (Cumulative cash flows / initial cash flow) Payback period 3+($3,850 / $16,400) Payback period 3+0.23 Payback period 3.23 years Table 1: Identifying the IRR, Payback period and NPV of Option 1 (Source: As created by the author) The above table 1 mainly helps in depicting the relevant IRR, Payback period, and NPV of option 1, which could allow Jason to increase their profitability. Furthermore, the investments in TOYEE might mainly increase the overall profitability of Jason, where it might provide an IRR of 21.79%, which is relatively higher than the required return of 5%. This high-end returns that is been provided by the investments in TOYEE is relatively adequate, which could allow Jason to generate higher returns. The overall returns provided by investment in TOYEE are relatively adequate, which could directly help in improving its returns in future. The overall IRR return mainly indicates that minimum return that is provided by the company over the period of time when investment in TOYEE is conducted. Abor (2017) argued that identification of internal rate of return allows managers to pin point projects that could provide the quickest retune from investment. However, Alkhamis et al. (2017) mentioned th at use of IRR valuation mainly allows organisations to identify relevant projects, which has the quickest return from investment. The overallaccounting rate of return was mainly at 56.83%, which depicts the relevant return, which is generated by the investment. The overall ARR is relatively higher than 5% required rate of return, which mainly depicts the relevant income that could be generated by investment. Cucchiella, D'Adamo and Koh (2015) stated that with the help of ARR method mentioned companies are mainly able to measure the overall profitability that might be generated from investments. On the other hand, Castellucci et al. (2016) argued that ARR directly ignores the time value of money, which is an essential part of project evaluation. The overall payback period of investment in TOYEE is mainly at 3.23 years, which could allow the organisation to attain the relevant investment within the time of 3 years and 2 months. Companies to identify the minimum time mainly conduct the evaluation payback period, which is taken by the project to return the initial investment. Kostesek et al. (2015) stated that payback period is mainly identified, as the viable option of investment appraisal technique, where managers are able to identify projects that could quickly provide the relative return from investment. On the other hand, Kwan et al. (2015) criticises that payback period does use time value of money, which reduces the overall viability of the investment. Portraying the 5 year projected cash flow of Revell Inc: Particulars 2018 2019 2020 2021 2022 Cash flow from operating activities Net Income $ 5,790 $ 7,050 $ 7,400 $ 7,766 $ 7,606 Add back non cash expenses depreciation $ 123 $ 1,115 $ 1,244 $ 1,380 $ 1,523 Subtract gains and add losses Other income $ 874 $ (469) $ (497) $ (527) $ (559) Subtract increase and add increase in current assets Accounts Receivable $ 227 $ (611) $ 271 $ (637) $ 262 Inventory $ 33 $ (133) $ (92) $ (144) $ (105) Prepaid Expenses $ 340 $ (96) $ (101) $ (106) $ (111) Add increase and subtract decrease in current liabilities Trades Payable $ (10) $ (93) $ 215 $ (67) $ 203 Accrued Liabilities $ (700) $ 242 $ 254 $ 266 280 Income Tax Payable $ (6) $ (80) $ 6 $ 10 $ 6 Cash flow from operations $ 6,671 $ 6,925 $ 8,700 $ 7,941 $ 9,105 Cash Flow from Investment Property, Plant and Equipment, net $ 167 $ (686) $ (626) $ (593) $ (550) Long-term Investments $ 1,998 $ (347) $ (367) $ (390) $ (413) Other Non-Current Assets $ 656 $ (556) $ (584) $ (611) $ (641) Cash Flow from Investment $ 2,821 $ (1,589) $ (1,577) $ (1,594) $ (1,604) Cash flow from financing Notes Payable $ 147 $ 377 $ 227 $ 373 $ 235 Long-term Debt $ (496) $ 167 $ 104 $ 171 $ 107 Share Capital and common stock $ 588 $ 532 $ 329 $ 544 $ 342 Cash flow from financing $ 239 $ 1,076 $ 660 $ 1,088 $ 684 Total change in cash $ 9,731 $ 6,412 $ 7,783 $ 7,435 $ 8,185 Cash at beginnings $ 4,308 $ 4,979 $ 4,987 $ 4,996 $ 5,005 Total Cash inflows $14,039 $11,391 $12,770 $ 12,431 $ 13,190 Table 2: Mentioning the Cash flow statement of Revell Inc (Source: As created by the author) Depicting the best options, which could be used by Jason for improving its return from investment: Projected cash flow of Revell Inc. Year 2017 2018 2019 2020 2021 2022 Projected cash flow $ (37,500) $ 14,039 $ 11,391 $ 12,770 $ 12,431 $ 13,190 Cumulative cash flow $ (37,500) $ (23,461) $ (12,070) $ 700 $ 13,131 $ 26,321 Required rate of return 5% NPV $17,795.38 Payback period 2.95 Years IRR 21% Table 3: Mentioning the IRR, Payback period, and NPV of Revell Inc (Source: As created by the author) Projected cash flow of Tamiyah Inc. Year 2017 2018 2019 2020 2021 2022 Projected Cash Flow from operating Activities $ (37,500) $ 18,560 $ 21,260 $ 26,850 $ 21,450 $ 17,430 Cumulative cash flow $ (37,500) $ (18,940) $ 2,320 $ 29,170 $ 50,620 $ 68,050 NPV $53,957.51 Payback period 2.89 Years IRR 48% Table 4: Mentioning the IRR, Payback period, and NPV of Tamiyah Inc. (Source: As created by the author) After the evaluation of overall Table 3 and table 4 relevant investment option for Jason could be identified, which would help in increasing its over or return from Investments. Table 3 mainly provides the overall investment appraisal evaluation of Revell Inc, where NPV, IRR, and payback period is depicted. The use of NPV, IRR, and payback period could help in identifying the most viable investment option that might increase the return. However, after the evaluation it is estimated that the cash inflow of Revell Inc is a relatively lower than Tamiyah Inc. Furthermore, this is the main reason why Jason should invest in Tamiyah Inc, as it might increase its overall return from investment. Larson and Gray (2013) mentioned that all the investment appraisal techniques do not provide the same level of evaluation, as they have both cons and pros. The above tables also defect the relevant investment appraisal calculation, where payback period of Revell Inc is at 2 years 9 months, NPV is at $17,794.99, and IRR is at 21%. However, in comparison to Tamiyah Inc it is relatively lower, as it has payback period of 2 years 8 months, NPV is at $55,957.51, and IRR is at 48%. The overall calculations depicted in the above statement mainly identify Tamiyah Inc, as the most viable option which could help Jason to improve its overall return from investment. Pechmann, Scholer and Ernst (2016) argued that Investment appraisal techniques mainly loses its friction if adequate evaluation of data is not conducted, which nullifies all the result provided by the methods. On the other hand, Malek et al. (2017) stated that investment appraisal technique allows organisation to evaluate the project on the basis of time value, which helps in discounting all the relevant future cash inflows. After the overall evaluation of different projects and appraisal techniques, it is estimated that Jason must invest in TOYEE and Tamiyah Inc, as both the investment could provide the relevant returns. Hence, the investment could provide a return higher than 5%, which could help in increasing the capital value in future. Mentioning why managers use IRR rather than NPV when carrying out discounted cash flow evaluation: Maximum of the managers mainly focus on internal rate of return method, as it helps in identifying overall projects, which will quickly provide the return from investment. However, NPV method is best used by stockholders or shareholders, as they need higher returns from investment rather than quick return. In case of managers they are mainly focused in identifying projects that have the highest IRR, as it will help in generating the cash inflow quicker and use that money on other projects. The investment project does not have to provide higher NPV for the managers to choose that project. In this context, Sultan et al. (2014) mentioned that managers by using IRR method are able to identify the maximum return that might be provided from an investment, which helps in reducing the struggle of finding cost of capital for an investment. Managers with the help of IRR method are able to increase the process of reinvestment, as it allows the organisation to generate higher revenue from the sa me capital. However, Robinson and Burnett (2016) argued that NPV method is more reliable than IRR method, as it accommodates time value of money, which could help in discounting all the relevant future cash inflows. References: Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting. InEntrepreneurial Finance for MSMEs(pp. 293-320). Springer International Publishing. Alkhamis, N., Noreen, U., Ghonaim, L., Alghonaim, S., Ibrahim, S. and Alturki, R.A.A., 2017. Capital Budgeting and Capital Structure Decisions in Saudi Arabia.Advanced Science Letters,23(1), pp.330-332. Castellucci, V., Garcia-Teran, J., Eriksson, M., Padman, L. and Waters, R., 2016. Influence of sea state and tidal height on wave power absorption.IEEE Journal of Oceanic Engineering. Cucchiella, F., D'Adamo, I. and Koh, S.L., 2015. 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