Identifying and evaluating two proposed projects for Camerons Balloons - discuss the suitability of investment appraisal methods which are used and analysed on estimated cash flows.

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Unit 11c


Introduction

In this report I will be identifying and evaluating on two proposed projects for Cameron’s Balloons and I will discuss the suitability of investment appraisal methods which are used and analysed on estimated cash flows.  Cameron’s Balloons is the world's largest manufacturer of hot-air balloons, special-shaped balloons and hot-air airships.  Cameron Balloons excels in all aspects of fabric technology from medical products, to fabric structures and inflatable buildings.  Investment Appraisal is a technique with several methods which answers if an investment project is worthwhile or not.  There are various types of investment appraisal methods and they are as follows:

  • Payback Period
  • Accounting Rate of Return (ARR)
  • Internal Rate of Return (IRR)
  • Profitability Index

Net Present Value (discounted cash flow

Companies invest because this will increase their productive capacity.  Businesses buy equipment, machinery and buildings to increase their capacity which then means that businesses can meet demands which will generate their sales value and investment will also raise their efficiency and productivity.

Cameron Balloons are trying to maintain as productive as possible by repeatedly re-assessing.  Cameron Balloons are assessing whether an investment should be made in new production technologies.  In this investment Cameron Balloons are in the decision of whether to mechanise the cutting process.  Cameron Balloons are cutting the fabric for the balloon envelopes by hand on cutting tables but there are moving-bed cutters which automate the process and cut the fabric by the computer templates.  One of the two main cutters cut the fabric with laser and the other one uses a high powered water jet.

Cameron Balloons are in the decision of investing in a new machine which will cost them between £200 and £125,000 which will depend on the machines sophistication.  Cameron Balloons has to consider the choice between the two machines by how cheap one of them will be and it will reasonably improve the efficiency and the other one will be expensive but have more benefits to the business.


The costs and extra income they expect from each machine is as shown in the table below:

The implication of investment including the risk and reward in investment and how this is related to investment decisions

Business investment is a loaded with doubt.  This is because the business is not aware if the return of the investment will be worthwhile and guaranteed.  Cameron Balloons will have a difficulty in making the decision of investment because there is an uncertainty of the return it will have.  There is various suppliers offer slightly different machines but Cameron Balloons will need to consider the prices, specifications, delivery times and terms and conditions.  Cameron Balloons will need to choose the machine which will generate the major return.

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The external factors when investing in a new machine for Cameron Balloons are:

Predicting the future costs and revenues will be difficult for Cameron Balloons and this possibly will be affected by some external factors.


The investment decision on return and why business should carry out investment appraisal

Businesses will make the decision of the investment by not just the return also the specification and the benefits the investment will create for the business.  Businesses invest to remain competitive, build up capacity, and other facts which will have a positive affect on their business.  In ...

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