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Edexcel Applied Business Unit 11 Finance Task C

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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.

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