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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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Introduction

Business studies 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. ...read more.

Middle

The table shows that Cameron Balloons will have a sooner payback from machine 1 which is the most suitable to be invested in at this method. Accounting Rate of Return (ARR) This technique is used to show the outcome of the investment. It will compare the profit generated by the investment with the cost of investment. By using this method Cameron Balloons will identify whether the investment gives a worthwhile return or not. The formula for ARR is: Average annual return or annual profit ARR = -------------------------------------------- Initial cost of investment The advantages of ARR are: * The technique concentrates on the profitability of the investment rather than the payback period. This is very useful because Cameron Balloons will want to know if the investment if profitable. * It is simple to compare investment projects and higher the ARR better the project. * This process could also be use to contrast the return on a certain project with the return on the capital employed in the whole business. The disadvantages of ARR are: * The scheme does not take into the account the timing of cash flows. This may be a problem if Cameron Balloons experience from poor or irregular cash flow. * Ignores the time value of the money - this means what the money is worth now and what it will worth in the future. ...read more.

Conclusion

capital expenditure because the profit made by the investment may not be identified * ROCE is generally used to evaluate historic performances not present performances * Comparisons may be damaged because of various measures of capital employed are used by businesses. The ROCE for Cameron Balloons Machine 1 25,000 X 100 = 62.5% 40,000 The ROCE for Machine 1 is 62.5% Machine 2 30,000 X 100 = 24% 125, 000 The ROCE for Machine 2 is 24% The ROCE calculation for both machines shows the results of 62.5% and 24% this means that machine 1 has a higher ROCE percentage and Cameron Balloons should choose to invest in Machine 1 at this stage. The higher the percentage the better it is to invest in. Cameron Balloons should decide to invest in machine 1 which is more beneficial and suitable for them in these circumstances. Different methods of investment appraisal have lead to different decisions. A business can benefit from variety investment opportunities, or they can decide to whether to invest or not invest at all. To invest a business need to come to a conclusion in their investment options. Different methods of investment appraisals show different costs which can be used to capital costs and expected net cash flows. Most of these investment appraisal methods look at the profitability of the investment projects. Cameron Balloons will use different investment techniques to look at the investment projects and evaluate them. ...read more.

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