Several topics included in the uploaded file (questions from the case Essay

Several topics included in the uploaded file (questions from the case study) - Essay Example There are many methods of investment appraisal. Each method analyses the investment in different ways. The three main methods are: ‘Payback time’, ‘Average / Annual rate of return’ and ‘Net present value (NPV)’. Payback method is used to compare various projects for a business; the project which gives the best returns is considered. It generally calculates the time taken for the return of capital invested. Similarly if the annual return rate is considered, the projects are selected based on the one providing highest annual returns. The company’s cash flow can change from time to time; thus, this method is helpful as it considers the ‘rate of returns’. Usually, there is a time lag in receiving the payment for the business done and money value might be inflated or deflated during this time lag. Hence, in the ‘Net Present Value’ or ‘Discounted Cash Flow’ method, the ‘real value’ of the mone y is considered. The returns calculated using this method is called ‘Real Return’ (Investment Appraisal, 2008). With respect to Hazlewood Sandwiches, capital investment was made for the following reasons: It was observed that people, in general, had become very busy with their existing jobs or multiple jobs and hence had very little time to cook. This was the main reason to foresee an increase the demand for sandwiches. Secondly, due to good earning and spending power of the people, they preferred to pay others to get their food prepared, rather than painstakingly cooking food themselves. This served as a time saver and therefore increased demand for readymade sandwiches. Thirdly, Hazlewood Sandwiches could provide foodstuffs with better quality than the best existing in market, promising exponential growth in market. In support to these factors, the new factory setup assured a superior production flow line which decreased the number of workers needed to move materials within the factory and helped to manage the inward movement of raw materials to outward movement of finished goods. Hence, these three reasons mainly influenced Hazlewood Sandwiches’ decision to make capital investment. Q2: Discuss the differences, advantages and disadvantages of the three investment decision techniques mentioned in the case. Investment appraisal decisions are very crucial for any company, since it involves the future of the company. Decisions have to be made between various alternative project plans which decide the next steps of the company. There are 3 techniques of investment appraisal: The first technique is ‘The Payback Method’. It directly calculates how quickly the return of the investment covers the investment on the project. Returns on investment are calculated for all the alternative projects in hand. It is based on the shortest payback period, contributing in the prevention of cash flow problems. It is known for its simplicity and ada ptability to changing technology as the cost of machinery can be recovered before the next new model is released. The disadvantage is that the returns after this period are ignored. Additionally, the real value of money is not accounted since value of money is considered directly without considering the inflation effects on money value (Business Studies online, Investment appraisal, Chapter 4a.2.2, 4a.2.3). The ‘Average Rate of Return’