# Investment Appraisal Calculations For New Production Line Accounting Essay

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The proposal is for a dedicated production line for a new product that will have an estimated life cycle of six years. This requires an initial investment of £12 million.

The following estimates have been made:

The proposed system will cost £12,000,000. It is not expected to have any residual value.

Sales volume

Year

Units (000s)

1

1,000

2

1,400

3

1,500

4

1,600

5

1,000

6

800

Selling price per unit

£12.50

Variable manufacturing cost per unit

£8.00

Other variable costs per unit

£1.00

Additional fixed overheads relating to the new product are estimated to be £800,000 per year.

The company's cost of capital is 15%.

Depreciation will be charged on straight line basis over the six years, i.e. £2 million per annum.

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

Accounting rate of return: minimum 25%, and

Payback period: within 3 years

During informal discussions managers in the organisation have told you that they like the accounting rate of return criteria because they find a percentage return for a project an easy concept to relate to.

You have carried out the following calculations for the proposal:

12.50

8.00

1.00

Sales

Var

Other

Incremental

Net Cash

Discount

Capital

Revenue

Cost

VC

Fixed Ohd

Flow

factor @

PV

Units sold

Year

£000

£000

£000

£000

£000

£000

15%

£000

0

(12,000)

(12,000)

(12,000)

1

12,500

(8,000)

(1,000)

(800)

2,700

0.870

2,348

1,000

2

17,500

(11,200)

(1,400)

(800)

4,100

0.756

3,100

1,400

3

18,750

(12,000)

(1,500)

(800)

4,450

0.658

2,926

1,500

4

20,000

(12,800)

(1,600)

(800)

4,800

0.572

2,744

1,600

5

12,500

(8,000)

(1,000)

(800)

2,700

0.497

1,342

1,000

6

10,000

(6,400)

(800)

(800)

2,000

0.432

865

800

0

(12,000)

1

2,700

2

4,100

3

4,450

4

4,800

5

2,700

6

2,000

PC calculation

## Profit & Loss Account

Depreciation

EBITDA

£2,000,000pa

Net Profit

£000

£000

Year

£000

1

2,700

2,000

700

Average annual profit

1,458

2

4,100

2,000

2,100

3

4,450

2,000

2,450

Average investment = (initial investment + residual value)/2

6,000

4

4,800

2,000

2,800

5

2,700

2,000

700

6

2,000

2,000

0

20,750

12,000

8,750

£000

£000

£000

£000

0

(12,000)

(12,000)

0

(12,000)

(12,000)

1

2,700

(9,300)

1

2,348

(9,652)

2

4,100

(5,200)

2

3,100

(6,552)

3

4,450

(750)

3

2,926

(3,626)

4

4,800

4,050

4

2,744

(882)

5

2,700

6,750

5

1,342

461

6

2,000

8,750

6

865

1,325

## 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 organisation, including an evaluation of their development and evolution.

(25%) Discussion of the financial appraisal of this project and the recommended decision, 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 approach for evaluating and making decisions on future capital investments within the organisation.

(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 1011 Assignment 2 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.

Discussion of the financial appraisal of this project and the recommended decision, using the financial data provided.

25%

Basic attempt to evaluate the project. Little use of data provided in discussion.

Some relevant evaluation of the project using the data provided.

Clear, relevant critical evaluation of the project, illustrated using the data provided.

Excellent use of data to support a critical evaluation of the project.

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 approach for evaluating and making decisions on future capital projects in this organisation.

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 organisation. Limited discussion of wider aspects of decisions.

A clear recommendation justified as to how decisions should be made within the organisation, 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

Excellent presentation, convincing arguments with academic rigour.

## 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: