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Investment Appraisal Question. Trevor must decide which project is best to invest money into. All three projects will bring him financial benefits

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Introduction

Investment appraisal is allocating scares resources among competing demands. In this case, Trevor must decide which project is best to invest money into. All three projects will bring him financial benefits, but there is also a risk attached, and Trevor must assess the risk towards Greengages. The financial returns are summarised in the table below: Greengages Cost ARR Payback NPV Total Profit (5 years) Rank Option 1 internet delivery £12,000 215% 18 months £72,456 £103,200 10 Option 2 Smoothies &Soup £22,000 100% 15 months £63,060 £88,000 11 Option 3 Sell Flowers £4,000 275% 8 months £32,640 £44,000 9 According to the table, Option 3 would be the least risky option, due to the low cost, fast payback and high ARR percentage. ...read more.

Middle

If Trevor is just interested in an simple, less risky project to earn cash for his early retirement then this would be the one to invest in, however further financial problems could occur due to recruitment and training. Despite Option 2 being ranked the worst on the table, it is the project that would be the most efficient for Trevor. Trevor likes the idea that he would be minimizing stock wastage levels by using the waste fruit and vege he currently sells, also he believes the level of staffing is sufficient. Trevor already has experience in this sector, and it could be successful. The only real issue with Option 2 is the time that it will take for Trevor to receive the full financial benefit of the project. ...read more.

Conclusion

The demand for this product could be high, so it is important that Trevor researches into the internet market, however he has experience with the product that he is selling. I believe the best option for Trevor would be Option 1. Option 1 gives Trevor the best overall profitability for the project. This may be a risky venture as the majority of the cash flow is earnt in later years; this could be affected by external factors. However by providing his specialist product lines online he is making them available to a larger and growing market. He is therefore is gaining a competitive advantage over the supermarket as he is widening his business environment. Appendix 4 suggests just how popular online stores can be. The online venture could prevent profits dwindling due to supermarket competition. ...read more.

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