• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Edexcel Applied Business Unit 11 Finance Task C

Extracts from this document...


Unit 11 Task C - Impact of finance of business decisions When making an investment it is important that business decide the best thing to invest their money in. To make these decisions businesses often use investment appraisal. There are three main methods of investment appraisal and these are; Payback, Accounting rate of return (ARR) and Net present value. Payback Payback shows how long it takes to earn the initial investment cost back. Payback is usually calculated in years and sometimes months for a more precise result. Firm usually hope for payback ASAP this will show that the investment has paid off well and has been the right decision for the business. Payback is calculated by looking at the inflows, outflows and net flow of a business from the start of the investment, and then working out the cumulative. When the cumulative reaches 0 this shows that the cost of the investment has been paid off and you can see how many year it will take. To work out the months you look at the year when the investment has been paid off and divide the net flow by 12 which is the number of months in the year. This shows the average net flow for a month. Then by looking at the cumulative you can see how much money is needed from the month before the investment is paid off. ...read more.


By looking at the alternative of the outside delivery firm; this does cost Lee ltd �50,000 per year. We can see that the investment of �150,000 would be the same of the outside delivery firm for three years. The time it takes for the �150,000 to be paid back is over three years therefore we could say it may be better sticking with the outside firm. On the other hand, this would be a good long-term benefit as after the loan has been paid back Lee ltd do not have to pay yearly fees. The Network project shows a payback period of three years and this is less time then the Transport project, and the shorter the pay back period is the better it is for a business because they can start earning a profit on the investment quicker, therefore it seems that the Network Project would be more suitable for Lee Ltd. However this may not attract Lee ltd as they may be looking at the long term results of the investment and therefore the timing of when the investment is paid back may not interest them much. Secondly the Accounting Rate of Return appraisal has shown that the Transport Project would make a 10.64% return. This may seem like a good rate however the interest on the loan is 14% and therefore until the loan is paid of the ARR of 10.64% would not be worth it. ...read more.


What if the figures were -20%? This would make a substantial difference. NPV (-10%) Year Net Flow Discounted Cash Flow 0 (150,000) (150,000) 1 34,200 30,000.24 2 37,260 28,671.57 3 40,320 27,216 4 45,180 26,755.596 5 49,860 25,897.284 Total: -11459.31 This figure shows a minus which is really bad for a business as it means the value of it in the future will be in minus. Therefore it may be a big risk for Lee ltd because if there figures are inaccurate and -10% it could cause big problems for them in the future, and the investment will not be worth it. Conclusion I would recommend that Lee Ltd choose the Network Project; all three investment appraisals showed that The Network project would be stronger. Also by conducting the sensitivity analysis we can see what if the figures are wrong? When looking at the NPV we can see there is a high risk for the Lee Ltd choosing the Transport project because of the minus figures. On the other hand I feel that the Transport Project has better non financial benefits as it will be worth it in the long term as it becoming a fixed asset. And also the Network project may be outdated quickly and they will need to keep updating it. However by looking at all the strengths and weaknesses of each project I draw to conclusion that by choosing the Network project Lee Ltd will make a big return and also be able to expand in the modern type world. ?? ?? ?? ?? Caroline Noades ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. P1- The role of internet marketing

    Businesses such as HMV provide a download section where they cannot provide in the stores, this will make it easier for the customers to go online and download a single track rather than buying the entire CD. Another example is Dell.com, customers can download any software they wish to have

  2. Sources Of Finance

    The advantages of using this additional source of finance to develop the expansion idea are: * Selling the businesses assets that are no longer needed. This is an advantage because the business is getting rid of unused property, machinery, vehicles, fixtures etc, that the business no longer needs to help

  1. costing methods - absorbtion and variable costing

    The channel environment, legal environment, consumer pricing regulations and the international setting are also key issues in the determination of price. Selling prices are not easy to determine in practice because of the difficulty in estimating a product demand curve Colin 1996, p.337 The supply and demand illustrate market interaction

  2. A2 Business CourseWork

    They try to stock a wide variety of products right across the board, even in their small, high street stores which stock over 2,000 products. They also take advice from their customers as to what they want and they try, where possible to stock them.

  1. Financial Ratio Analysis.

    Emma has no cash to show for her efforts until June but her customers are legally bound to pay her and she is legally bound to pay for her purchases. 2.3 Defining Cash flow accounting 2.3.1 Cash flow accounting It is a system of accounting that the records only the

  2. Edexcel Applied Business A2 unit 11 finance task A

    Depending on different types of businesses the sources of finance they use will vary. Thomas Cook Group Plc is a public limited company therefore they can use rights issues as they have shares open for the public. Public shares can only be used for public limited companies and therefore this

  1. Sources of Finance

    sum annually until maturity and then a fixed sum to repay the principal (Jones 1967). He also stated that bonds are rated based on the issuer's creditworthiness. When issuing bonds, companies can enjoy lower interest rates and longer term than a traditional commercial bank and flexibility in choosing a variable or fixed interest rate (http://www.state.nj.us/njbusiness/financing/general/bond.shtml).

  2. Estimate the cost of equity appropriate for the evaluation of the incremental cash flow ...

    USD worth of laminate technology is bought and installed. So we had calculated additional NPV, which has derived from cost savings and tax benefits we have out of buying the additional laminate technology. Our assumption is NPV with laminate technology = NPV without laminate + NPV additional savings.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work