Evaluate The Significance Of Capital Investment Appraisal Accounting Essay

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You are the Managing Director of a public limited company that manufactures consumer products. You have agreed to write a paper for the next Board meeting, to propose a revised company policy for evaluating and making decisions on future capital projects such as the proposed £20 million investment in a new production line. Your paper will need to explain the rationale for having a corporate policy on such decisions, which must include a critical evaluation of how investment appraisal methods have developed to support corporate investment decision-making. It should also discuss wider financial and non-financial aspects of the evaluation of capital investment and the implications of these for the decision-making process. Your discussion should be supported by research, including relevant, current corporate practices. Your recommendation should be justified and linked to earlier discussion points.

All references should be relevant to the discussion and in accordance with 'good academic practices' (see 'citing references' guidelines and sources of support materials in this assignment briefing sheet).

SCENARIO FOR ASSIGNMENT

Financial information for new production line for Southampton Consumer Products plc

The appraisal is for a new product that will have an estimated life cycle of six years and which requires a new dedicated production line. The entry into this new market will require an initial investment of £20million, and at the end of six years the equipment will have an estimated scrap value of £2million.

The following estimates have been made:

Sales Volume

Year

(000s)

1

800

2

1,400

3

1,500

4

1,600

5

1,000

6

400

Selling price £25 per unit

Variable cost of each item £16

Variable marketing cost per unit £2

Additional marketing overheads for the new product are estimated to be £1,600,000 per year.

The company's cost of capital is 15% and, apart from the initial investment, all other cash flows can be assumed to arise at year-ends.

Depreciation will be charged on straight line basis over the six years. i.e. £3million per annum.

The company currently uses the following criteria for accepting or rejecting major projects:

Accounting rate of return: minimum 30%, and

Payback period: within 3 years

Other Instructions

You should provide an exact word count (excluding references and bibliography) on the front page of your assignment and append a full bibliography at the end of your discussion. It is very unlikely that a satisfactory answer can be provided in less than 1,500 words.

You should use the Harvard Referencing System for references in both the main body of your assignment and the bibliography. A leaflet explaining this system can be downloaded from the library section of the portal:

http://portal-live.solent.ac.uk/library/leaflets/resources/US06.pdf

Submission of this assignment should be via the link on the MyCourse site for this unit. This link will allow multiple submissions of drafts through Turnitin to enable you to check your work. The submission of your final version should be made via the same link by the date and time given on the front of this briefing. Please note that at busy times the system may be slower so make sure that you allow for this and submit your finished work in good time.

Assessment criteria (weightings indicated for each criterion)

(20%) Critical appraisal of a relevant range of capital investment appraisal methods and techniques available to the company, including an evaluation of their development and evolution.

(25%) Critical evaluation of the role, relevance and application of Capital Investment Appraisal for the company, using the financial data provided.

(15%) Evaluation and relevance of examples of current practice used to support discussion.

(30%) Justification and articulation of a recommended policy for evaluating and making decisions on capital investments within the company.

(10%) Presentation of academic research to support arguments.

Learning Outcomes

This assessment will enable students to demonstrate in full or in part the learning outcomes identified in the unit descriptor:

Evaluate a range of concepts and theories available in academic literature, to support the collection and collation of relevant and reliable financial information, applicable to a range of complex financial management decisions.

Critically evaluate the contribution that financial theory can provide in support of finance based management problem resolution.

Produce and critically evaluate recommended solutions to complex finance-based business problems.

Use secondary research to evaluate, justify and propose reasoned approaches and solutions to both operational and strategic financial management problems.

Effectively communicate finance-based problem definition and resolution.

FDM Period 1 0910 Assignment 1 Assessment grid

FINANCIAL DECISION MAKING - MARKING CRITERIA

Assignment 2

Weighting

0% - 39%

40% - 59%

60% - 69%

70% +

Critical appraisal of a relevant range of capital investment appraisal methods and techniques, including an evaluation of their development and evolution.

20%

Insufficient consideration of investment appraisal development and evolution.

Some, but limitations in depth of evaluation, of investment appraisal development and evolution.

Clear, critical appreciation of the development and evolution of investment appraisal techniques and their related uses.

Critical evaluation of the development and evolution of investment appraisal techniques, linked to relevant examples.

Critical evaluation of the role, relevance and application of a range of capital investment appraisal techniques, using the data provided.

25%

Basic attempt to evaluate the use of Capital Investment appraisal. Little use of data provided in discussion.

Some relevant evaluation of capital appraisal techniques using the data provided.

Clear, relevant critical evaluation of investment appraisal techniques, illustrated using the data provided.

Excellent use of data to support a critical evaluation of Capital Investment Appraisal techniques available to be used by the company.

Evaluation and relevance of examples of current practice used to support discussion.

15%

Little or no attempt to support the discussion with own examples.

Some use of own examples of current practice in support of the discussion

A good range of relevant corporate examples used to support the critical discussion and evaluation.

Relevant corporate examples critically evaluated in support of the critical evaluation of investment appraisal methods and techniques suitable for consideration by the company.

Justification and articulation of a recommended policy for using Capital Investment Appraisal within a UK Public company.

30%

Little evidence or reasoning provided in support of the recommendation proposed. Little or no discussion of wider aspects of decisions.

Recommendation provided, supported by earlier discussion, with some justification for use within the company. Limited discussion of wider aspects of decisions.

A clear recommendation justified as to how decisions should be made within the company, incorporating the assessment of non-financial factors. Recommendation clearly linked to earlier discussion.

Convincing lines of argument made in support the recommendation made, which includes a comprehensive discussion of financial and non-financial factors.

Presentation of academic research to support arguments.

10%

Poor expression, structure and referencing.

Acceptable standard of structure and referencing but some omissions

Good academic presentation.

Excellent presentation, convincing arguments with academic rigour.

Your script will be marked against the criteria above. The percentages refer to the relative weightings of each element. A sample of the marking will be moderated and some scripts will be copied for the use of the external examiner.

Extenuating Circumstances

The University's Extenuating Circumstances procedures are in place if there are genuine circumstances that may have affected your academic performance. Remember however you need to be 'fit to study', this means that you can either submit your assessed work or declare extenuating circumstances, but you cannot do both.

A summary of guidance notes for students is given below:

http://blade2-5.solent.ac.uk/DocMan8/rns?RNSExact=ASQS/PPG/1234570925

Academic Misconduct

Any submissions must be your own work and, where facts or ideas have been used from other sources, these sources must be appropriately referenced. The University's Academic Handbook, includes the definitions of all practices that will be deemed to constitute academic misconduct. You should check this link before submitting your work.

Procedures relating to student academic misconduct are given below:

http://blade2-5.solent.ac.uk/DocMan8/rns?RNSExact=ASQS/PPG/1234570157

Ethics Policy

The work being carried out by the student must be in compliance with the Ethics Policy. Where there is an ethical issue, as specified within the Ethics Policy, then the student will need an ethics release or an ethical approval prior to the start of the project.

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